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


Web Log - July, 2007


Nouriel Roubini brags that he predicted a housing recession a year ago. Whoo hoo.

As people scramble to cover their asses, the Principle of Maximum Ruin tightens its grip.

Nouriel Roubini is a professor of economics and international business at the Stern School of Business, New York University. He's a Very Important Person not only because he's a professor, but also because he's been economics adviser to Presidents and other government officials, and because he's sought after as a TV "expert" pundit.

In fact, he's such an Important Person that when he posts articles on his weblog, he usually justs posts a couple of paragraph, and then charges money to read the rest of the article. So unfortunately I usually don't check his weblog too often.

But I did check in recently, and was bemused to see him bragging about predictions he made a year ago -- well, last August, actually. He writes, "I predicted a year ago this will be the worst US housing recession in the last five decades and that real home prices will sharply fall for three years: all indicators on housing - including the latest new and existing home sales -- suggest that the housing recession is extremely severe as sharply worsening."

Well, what took him so long?

A lot of people were talking about a housing bubble in 2004. In July, 2004, I wrote an article entitled, "Real estate is in an overpriced bubble all over the world":

"Residential properties in countries around the world, including America, Australia, the United Kingdom, China, South Korea, Spain, the Netherlands, and South Africa, are overpriced by 50% or more. ...

Since 2002, we've been pointing out that Generational Dynamics predicts that we're entering a new 1930s style Great Depression, and that stock prices will fall by 50% in the next few years. The Fed's low interest policy has postponed the effects of the Nasdaq crash of 2000, but has not eliminated them.

So it's good that Prof. Roubini finally began to catch on last August. He obviously knew in 2004 that housing prices were increasing, because everyone knew that, but he didn't know until a year ago that it would have major repercussions -- a "housing recession," as he calls it.

How come I knew that it was important, and he didn't?

It's the way that Generational Dynamics forecasting works. You start with long-range forecasting techniques that I've explained many times -- exponential growth forecasting, mean reversion as applied to price/earnings ratios, and generational theory as developed in my article on "System Dynamics and the failure of Macroeconomics theory."

This is what makes the difference. Since I know where we're going, I can tell right away which short term trends will last and which ones won't. Thus, when a housing bubble developed in 2004, I could see immediately that it fit into the long-range trend, and therefore would be very important.

Roubini and other mainstream economists don't have that advantage. All they can do is look at short term trends and try to guess -- and they're almost always guesses -- which ones will last. Since they don't like to be wrong, they wait as long as possible to take a guess, so that they won't be fooled.

And even then they have to be cautious. Roubini could only predict a "recession." Maybe he would have liked to predict a larger crisis, but could not because he can't be sure. He has no sense of long-range forecasting, and so anything he says is just a guess.

As I look back over the last few years, I try to think of the various people I've quoted or written about, wondering which of them had any idea what was going on.

I'd have to include "analyst Adam Barth of Hoboken, N.J., based Barth Research," who wrote a 2005 article for Barrons that I quoted in my 2005 article on long-range forecasting mentioned above. Out of curiosity, I just googled "Adam Barth 'Barth Research'," and nothing comes up except my own article and the Barron's article. Did Adam Barth really exist, or was it someone else not wanting his real name used? I don't know, but he wrote a good article.

Then there's Stephen Roach, chief economist at international investment firm Morgan Stanley. I've followed much of what he's written, and quoted him. For a long time I thought that he understood long-term forecasting, especially because of his reasoning when he predicted "economic Armegeddon" in 2004.

But then he wrote a truly bizarre essay in May of last year, saying that he was "optimistic on the world economy" for the first time in ages. The reasoning that he gave for this turnaround was so specious, that I no longer believe that he has any concept of long-range forecasting, although he may be especially astute at short-range forecasting.

Current Fed chairman Ben Bernanke has been a special disappointment. Of all the major figures in finance today, this man understands the least, as I documented in my 2005 essay, "Ben S. Bernanke: The man without agony." He understands nothing about what's going on in world macroeconomics. He doesn't believe in bubbles; he believes that the 1930s Great Depression could have been avoided if the Fed had simply lowered interest rates; he believes that America's credit imbalance is caused because other nations have a "savings glut." And a couple of weeks ago he gave an unbelievably bizarre speech on inflation. Every time I read or hear something from him, I just have to shake my head in incredulity.

In that same 2005 essay, I also documented former Fed chairman Alan Greenspan's attitudes.

Up until early 2004, Greenspan believed that, thanks to Fed policy, the country had avoided the major consequences of the 1990s dot-com bubble. Up to this time, he was in agreement with Ben Bernanke -- they had lowered interest to near-zero, and thus avoided a new Great Depression.

But during 2004, Greenspan's statements and speeches became increasingly agonized, as the housing bubble grew and the credit bubble grew and the trade deficit grew. By January, 2005, Greenspan had totally repudiated his previous reasoning "because yields and risk spreads have narrowed globally." It was at this time that he used the word "conundrum" over his puzzlement that international long-term interest rates were much lower than mainstream macroeconomics could predict or explain.

I've never seen any commentary on Greenspan's January 2005 speech, but in my opinion it's one of the major speeches in the history of world finance -- not because it broke any new ground, but because it stated explicitly that everything that he and other economists had said up to that point was completely wrong. The implication was that neither he nor anyone else had any idea what was going on, and that of course is what happened.

His public remarks were at their starkest in his “swan song” Fed speech at the end of August, 2005. In that speech he commented favorably on the economy’s flexibility because it encourages investor risk, but warned about the stock market and housing bubbles, and added:

"To some extent, those higher [stock and housing] values may be reflecting the increased flexibility and resilience of our economy. But what [investors] perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

Now here we can get back to Roubini. He's bragging that he predicting a "housing recession" a year ago, but Alan Greenspan said as much in August, 2005. Why wasn't Roubini aware of that?

And so I have to conclude that of all the people I've quoted and described on this web site, there's only one person who appears to know what's coming -- Alan Greenspan -- and even he was late, as he only realized in 2004 or 2005 what was going on.

Still, Greenspan's speech made absolutely no impression on anyone, as far as I can tell. His repudiation of his previous reasoning was completely ignored.

Contrast that with a speech that one Roger Babson made on September 5, 1929. Several months ago I quoted a lengthy passage from John Kenneth Galbraith's book, The Great Crash - 1929, in which he stated that Roger Babson's speech was the "immediate cause" or trigger for the crash of 1929. In that speech, Babson said, "Sooner or later a crash is coming, and it may be terrific," and he concluded that "factories will shut down ... men will be thrown out of work ... the vicious circle will get in full swing and the result will be a serious business depression." What's odd is that Babson had previously made similar predictions, but no one paid any attemption. But for some reason, the climate was right on September 5, 1929, for his speech to strike a chord with investors.

The Bear Stearns announcement two weeks ago that its hedge funds are almost worthless is proving to be a significant event, that's weighing on the investor community. It may even turn out to be the same kind of trigger that Roger Babson's speech was, 78 years ago. The sharp drops in stock markets around the world at the end of last week certainly lend support to that idea. It's impossible to predict short-term events, but the events of the last few days are extremely ominous.

The last few weeks have been a very difficult time for me personally, and especially the last few days. I really dread what's coming, and it's hard to sleep. It's a total disaster, and everyone's oblivious. It's getting to the point where just the day's news makes me feel like I'm going to vomit.

I've been talking to some friends and warning what's coming, and they just shrug. I start to explain about CDOs (collateralized debt obligations), but all I get is blank stares. As I wrote a couple of days ago, CDOs are no different than tulip certificates from 1636. I'm starting to imagine the global economic bubble as a huge, monstrous house that's grown larger and larger, thanks to being stuffed with CDOs. In this nightmare, the CDOs are tiny larvae that turn into termites that are eating away at the home. Already several pieces have fallen off -- the Bear Stearns hedge funds, for example, and the quickly rising list of major U.S. vendors that have "imploded" -- now up to 105 since December. Soon the whole house will collapse. And everyone's oblivious.

For example, a week ago I spoke with a guy that I work with, and I told him to sell. I told him what was happening with CDOs, and I told him if he didn't believe me he could just look it up online in the mainstream news. "I'm not making this stuff up, you know. You can read about it in the Wall Street Journal or the New York Times business news." I told him this was going on right now, and that he shouldn't waste any time. He said he would think about it, but of course he did nothing. Then on Friday I spoke to him again, and of course he couldn't sell then because the market has gone down 500 points (Dow). So he has to wait until the market goes up to 14,000 again. Sigh. That might not be until 2022, and he's totally oblivious.

That's the trap that investors are in. It's the Principle of Maximum Ruin that I've discussed before. After the 1929 crash, the stock market kept falling for four years. As the market fell, people with stocks poured more and more of their savings into the market to meet margin calls. Other people were told by "experts" that the worst was over and that it was time to buy, and so they did. In the end, the maximum number of people were ruined to the maximum extent possible. That's the Principle of Maximum Ruin.

Oh, they built the ship Titanic and when they got her true
They said here's a ship that the water won't go through
But the Lord with mighty hand said this ship it will not stand
It was sad when the great ship went down.

It was sad, Lord, sad, it was sad, Lord, sad
It was sad when the great ship went down,
To the bottom, Lordie.
Husbands and wives, itty-bitty children lost their lives
It was sad when the great ship went down.

Oh, they left Eng-ge-land, and they sailed from the shore
But the rich refused to associate with the poor
So they sent them down below where they'd be the first to go
It was sad when the great ship went down.

It was sad, Lord, sad, it was sad, Lord, sad, etc.
(30-Jul-07) Permanent Link
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Japan: Prime Minister Shinzo Abe suffers major election defeat on Sunday

Abe appears unable to govern, like Boomer politicians in America.

Japanese Prime Minister Shinzo Abe's ruling Liberal Democratic Party (LDP) suffered a major parliamentary election defeat on Sunday, when the party lost its majority in the upper house of the Diet (parliament). However, the LDP retains a large majority in the lower house, and so can still legislate.

From September, 2006: Newly elected Liberal Democratic Party President Shinzo Abe, right, and his predecessor, Prime Minister Junichiro Koizumi applauding <font size=-2>(Source: AP)</font>
From September, 2006: Newly elected Liberal Democratic Party President Shinzo Abe, right, and his predecessor, Prime Minister Junichiro Koizumi applauding (Source: AP)

When Shinzo Abe became Japan's Prime Minister in September of last year, he was distinguished by two big things: First, he was considered conservative, and the most hawkish Prime Minister since World War II; and second, he was the first Prime Minister born after WW II.

Just as America's government, led throughout by Boomers, the first generation born after World War II, the Japanese government has become increasingly paralyzed following Abe's victory.

We've seen this over and over again in countries around the world. It's now 62 years since the end of World War II, and as the leadership in each country passes to the generation born after the war, the government becomes paralyzed, while the people become more xenophobic:

The near-collapse of the LDP government in Japan is being called "historic," inasmuch as the LDP has been the ruling party since 1955. Abe's fall from grace has been especially spectacular, because of highly visible scandals in national health and pension systems. These scandals became electric in May when it turned out that 50 million national pension records are missing, meaning that many people who had paid into the pension system now have to provide, via decades-old receipts, that they did so, or lose their pensions. A scandal over agriculture caused the agriculture minister to commit suicide in May.

In many ways, these scandals are similar to American scandals over Hurricane Katrina and the Walter Reed hospital scandal. What these scandals have in common is that they show that aging, increasingly lethargic and uncaring bureaucracies can no longer respond as quickly to national emergencies.

From the point of view of Generational Dynamics, these paralyzed bureaucracies and governments will maintain the status quo until some spark occurs, forcing a dramatic change. As time goes on, the xenophobic populations become increasingly anxious and fearful, and a small spark can ignite a blaze the leads so a major crisis or war. (30-Jul-07) Permanent Link
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Cars banned from Baghdad as Iraq wins historic victory in soccer

Both the BBC and CNN International are expressing thrilled excitement on Sunday as euphoric Iraqis watch their team, made up of Shiites, Sunnis and Kurds, win a final game versus Saudi Arabia in the Asia Cup football (soccer) finals in Jakarta.

Final moments of Asia Cup finals -- Iraq vs Saudi Arabia <font face=Arial size=-2>(Source: CNN)</font>
Final moments of Asia Cup finals -- Iraq vs Saudi Arabia (Source: CNN)

Earlier, Iraqi officials banned all vehicles, including bicycles, from downtown Baghdad from 4 pm Sunday to 6 am Monday (local time). Iraqis were infuriated on Wednesday when suicide car bombers interrupted celebrations in Baghdad after the Iraqi semi-finals victory.

Jubilant Iraqis in Baghdad celebrate victory  <font face=Arial size=-2>(Source: CNN)</font>
Jubilant Iraqis in Baghdad celebrate victory (Source: CNN)

The is a HUGE international news story, for a couple of reasons: First, soccer is extremely popular almost everywhere in the world outside the U.S.. Second, Iraq was an enormous underdog, starting the match as as a 50-1 outsider, and because it was thought that the so-called "civil war" in Iraq would make a unified Iraqi team impossible.

Iraqis themselves see this as a major double victory -- winning the Asia cup against all odds, and showing the world that Iraqis are unified.

There's little doubt that the Iraqi enthusiasm has been so infectious, it's even infected the BBC and CNN reporters who normally restrict their Iraq reporting to murders and bombing. Broadcasting a "good news" story on Iraq really goes against the grain, as when the BBC killed an Iraqi war story in April because it was "too positive."

Jubilant Iraqi soccer team pose with Asia Cup <font face=Arial size=-2>(Source: CNN)</font>
Jubilant Iraqi soccer team pose with Asia Cup (Source: CNN)

Iraq was Asia's ninth-ranked team. Its previous best performance was fourth place in 1976, whilse Saudi Arabia has won four Asia Cups previous.

I've heard media commentators complain that TV news has been spending too much time on Lindsay Lohan (who drove over someone's foot) and Nicole Richie (who, like Paris Hilton, drove while intoxicated), and aren't spending enough time on Iraq, by which they mean not enough time on bombings and murders. The Iraqi victory is giving the news channels an opportunity to present some positive Iraqi coverage, if they want to use it.

From the point of view of Generational Dynamics, Iraq is in a generational Awakening era, and a crisis civil war is impossible, as I've been writing since 2003. Iraq is very much like America in the 1960s-70s, which was America's last Awakening era.

As I wrote in my comprehensive analysis, "Iraqi Sunnis are turning against al-Qaeda in Iraq," the spectacular suicide bombings in Iraq that always lead the BBC and CNN news are almost always perpetrated by foreign suicide bombers recruited by al-Qaeda in Iraq.

Recent news and intelligence reports provide additional details about the nature of al-Qaeda in Iraq organization. It was started by a Jordanian, Abu Musab al-Zarqawi, who was killed last year. Al-Qaeda in Iraq's top leadership today comes from foreign countries: their emir in Baghdad is Syrian; the top spiritual and legal advisor is Saudi; other top leaders are Egyptian and Tunisian.

Of the countries mentioned here, all are in a generational Crisis era, except for Syria (also in an Awakening era), which supplied the Baghdad emir.

As I've written before, based on research obtained by combining Generational Dynamics research with Robert Pape's study of suicide bombers, published in the book Dying to Win, suicide bombers justify their terrorist acts as "altruistic suicide," and come overwhelmingly from countries in generational Crisis eras, and almost never from countries (like Iraq) in Awakening eras.

Thus, it's not surprising that Pape's research found that a disproportionate number of suicide bombers come from Saudi Arabia, which is extremely deep into a generational Crisis era, having had its last crisis war in the 1920s.

This research has been confirmed by a recent LA Times article that provided many details about how al-Qaeda in Iraq recruits suicide bombers from Saudi Arabia:

"Al Qaeda in Iraq and its affiliate groups number anywhere from 5,000 to 10,000 individuals, the senior U.S. military officer said. Iraqis make up the majority of members, facilitating attacks, indoctrinating, fighting, but generally not blowing themselves up. Iraqis account for roughly 10% of suicide bombers, according to the U.S. military."

There are still many "death squads" in operation, resulting in the murders of many Iraqi citizens, making Baghdad particularly to be an extremely dangerous place. There is evidence that, unlike the suicide bombers, the gunmen in these death squads are mostly Iraqi citizens.

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

The article reports that Iraqi officials are increasingly suspicious that the Saudi Arabian government is explicitly or implicitly encouraging Saudi terrorists to go to Iraq:

"Others contend that Saudi Arabia is allowing fighters sympathetic to Al Qaeda to go to Iraq so they won't create havoc at home.

Iraqi Shiite lawmaker Sami Askari, an advisor to Prime Minister Nouri Maliki, accused Saudi officials of a deliberate policy to sow chaos in Baghdad.

"The fact of the matter is that Saudi Arabia has strong intelligence resources, and it would be hard to think that they are not aware of what is going on," he said.

Askari also alleged that imams at Saudi mosques call for jihad, or holy war, against Iraq's Shiites and that the government had funded groups causing unrest in Iraq's largely Shiite south. Sunni extremists regard Shiites as unbelievers.

Other Iraqi officials said that though they believed Saudi Arabia, a Sunni fundamentalist regime, had no interest in helping Shiite-ruled Iraq, it was not helping militants either. But some Iraqi Shiite leaders say the Saudi royal family sees the Baghdad government as a proxy for its regional rival, Shiite-ruled Iran, and wants to unseat it."

What all this shows is how complex Iraq's role is in the Mideast. This is in contrast to the simplistic view presented by politicians and mainstream media journalists, who really haven't bothered to learn what's going on anyway. In the coming Clash of Civilizations world war, the Iraqi people will have no desire to participate, and will do everything possible to avoid participating, as is standard among countries in generational Awakening eras. Nonetheless, Iraq may be forced into it because their country will become a theatre of war between foreign armies.

I wrote about this in an article posted on August 19, 2003, shortly after Baghdad had fallen to the coalition forces. That was the time of the first major terrorist bombings, as a suicide bomber blew up the United Nations headquarters in Baghdad, just after they'd blown up an important oil pipeline and the Jordanian embassy.

Here's what I wrote at that time:

"And second, the terrorist acts may presage a larger regional war involving the Palestinian Arabs and the al Qaeda against Americans in Iraq. Iraq is in an awakening period, but the Palestine region is just about to enter a crisis period. Some analysts claim that the terrorist acts are being perpetrated by Palestinian Arabs and "Mujahadeen" being paid thousands of dollars each, funded by Saddam and Osama bin Laden, arriving from Syria and Saudi Arabia.

The really dangerous scenario is that large numbers of Palestinian and "mujahadeen" terrorists will be motivated by identity group relationships to move into Iraq as a theatre of war against the Americans. That isn't happening now, but it's one of several possible scenarios that may unfold in the Mideast region during the next few months and years."

Now, this prediction turned out to be exactly correct. No one else was making this prediction in 2003, but I was able to do so because it was the only possible outcome, based on Generational Dynamics theory. Those who claim that Generational Dynamics predictions are either "obvious" or "wrong" should understand that almost every one of the predictions that I've posted have been counter-intuitive at the time they were posted, and every one of these predictions has turned out to be correct, or trending correct. Not a single one has turned out wrong.

But what does this mean for the future of the Mideast?

As I've said many times before, my expectation, despite the partisan debates in Washington, is that American troops will remain in Iraq until the Clash of Civilization war begins, at which time they'll be withdrawn because they'll be needed elsewhere.

More and more, we're seeing that the centers of conflict are the Israeli/Palestinian region and the Pakistan/Afghanistan border. These are strongholds of al-Qaeda activity, supplemented by various African al-Qaeda groups in Egypt, Somalia and the Mahgreb (northern Africa).

Saudi Arabia has so far avoided being a major region of conflict. From the point of view of Generational Dynamics theory, the most likely reason is the large amounts of oil money flowing into the country for decades. But now we see another possible reason: That the Saudi government may have found a way to channel its terrorist youth into Iraq, if the charges of the Iraqi officials are correct. Whatever the reason, we should not expect to continue Saudi Arabia to remain conflict free, as al-Qaeda gains in strength. (As an aside, it's worth recalling that Osama bin Laden is Saudi, and the 9/11 suicide plane flyers were Saudi.)

As usual, the role of Iran remains a dangerous wildcard, for completely different reasons, as I wrote in my analysis of Iran earlier this month. Iran is also in a generational Awakening era, and the Iraqi people have no taste for war, and in fact are pro-American in many ways (though they don't like Americans being in Iraq).

However, the ruling Mullahs and President Mahmoud Ahmadinejad have been openly inviting war by supplying weapons to Iraqi terrorists, calling for the destruction of Israel, supplying weapons to Hizbollah (Lebanese terrorists) and Hamas (Gaza terrorists), and openly promoting a weapons-grade nuclear development program. They're doing this to try to re-capture the "spirit" of the 1979 Islamic revolution, but it's an extremely dangerous policy that could trigger a major war.

But here's one more connection that I haven't seen written anywhere, but may be playing a role.

The Iraqi citizens, are infuriated by al-Qaeda's suicide bombers, who indiscriminately murder masses of innocent Iraqi men, women and children. Iraqi citizens must be well aware that the overwhelming majority of suicide bombers are from Saudi Arabia.

Thus, when Iraqis jubilantly celebrate their victory over Saudi Arabia in Sunday's game in the Asia Cup soccer finals, it's a double celebration: winning the Asia Cup, and a highly visible victory of their unified soccer team over the country that's supplying suicide bombers to al-Qaeda in Iraq.

No wonder al-Qaeda in Iraq wants to ruin any Iraqi celebration. (29-Jul-07) Permanent Link
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Dow plummets 311 points as shaken investors sell out

European, North American and Asian stock markets generally fell 2-3% on Thursday and overnight Friday, amid increasing warnings about sharp credit contractions.

Reading and listening to the so-called financial "experts" today, it's hard not to wonder whether any of them have any idea what's going on.

I'm listening to some guy talk about how investors are losing confidence, and it may take a few days or weeks for investors to get their confidence back, so that the market can go up again.

No one ever asks the question that I've asked many times: Where SHOULD the market be? How much are stocks really worth?

If the value of stock market is based on fundamentals, then it's easy to get its "real" value. In a 2005 article called "The 11% Solution," I showed how to do it. And I've just updated my Dow Jones historical page, and at the bottom it shows that on Wednesday the "real" value of the market was at Dow 5253, meaning that it was overpriced by a factor of 262%.

Perhaps you don't believe that. Perhaps you believe that the value of the market is whatever investors say it is. OK, fine. That means it could be at Dow 14,000 or Dow 20,000 or Dow 100,000 or Dow 1,000,000. That's what you're saying, right? But it could also be at Dow 10,000 or Dow 5,000 or Dow 1,000. Why not? Can't it go up as well as down?

Most financial "experts" seem to look at it that way. So they talk about "investor confidence" as the only thing that matters, and increasing investor confidence is the only problem that has to be solved.

But what really affects investor confidence? What made investors so overconfident in the mid-1990s that they fed the dot-com bubble and

So here we are today, with pundits having NO IDEA WHATSOEVER what's going on. How do you increasing investor confidence? Who knows?

All that everyone's talking about now is that investors are LOSING confidence. They're getting panicky, the pundits are saying. But it's only temporary, the pundits point out.

What we're seeing in practice what was predicted theoretically by last year's article on "System Dynamics and Macroeconomics," and followed with an essay that I wrote on "A conundrum: How increases in 'risk aversion' lead to higher stock prices," based on work by Harvard economist named Robert J. Barro.

The dot-com bubble began in 1995, just at the time that the risk-averse survivors of the 1930s Great Depression all disappeared (retired or died), all at once. The younger generations were debauched in their use of credit, creating all those bubbles. and the huge liquidity bubble that the world has been experiencing.

But now those debauched investors are beginning to panic. They suddenly realize that they may be in over their heads, and about to drown. "You have a stampede of the animals away from the watering hole," said a pundit quoted by Bloomberg. Right now, everything that smacks of financial risk is backing out through the door."

So maybe there IS a "real" value of the stock market, after all. Maybe fundamental DO matter.

Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 26, 2007 <font face=Arial size=-2>(Source:</font>
Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 26, 2007 (Source:

I've been writing about the ABX index since February, when I wrote that the rapid collapse of ABX index indicates that investors may be starting to panic.

In fact, investors DID start to panic, ever so slightly. In the months since then, the level of panic and anxiety has been increasing.

You may wonder why I keep talking about this obscure ABX index, and also keep talking about those CDOs (collateralized debt obligations) and other credit derivatives. I realize that most people reading this web site have no idea what they are.

That's also true of ordinary investors. Whenever I speak to an investor, I start to tell him what's going on with CDOs, and I always get the MEGO look ("my eyes glaze over").

And yet, what's going on with CDOs is INCREDIBLY IMPORTANT. When this is all over it's the CDOs that will go down in the history book as having caused the crash.

And the graphs above show that the prices of these CDOs are already crashing. We're not waiting for some great worldwide panic or some generational change. They've been crashing since March, and they're continuing to crash every day, as more bad news about mortgage foreclosures comes in.

Ten days ago, Bear Stearns announced that its hedge funds are almost worthless. People had invested billions of dollars in those hedge funds, and many of those investors lost everything. Why? Because the hedge funds had invested in CDOs.

Think of the ABX index as a measure of the "value" of CDOs, and think of CDOs as certificates representing the mortgage market, as it continues to sink.

Here's another way to think of CDOs: Think of them as being similar to the certificates that people sold each other in the 1630s during the Tulipomania bubble.

I've quoted this paragraph a couple of times before, but it such a powerful paragraph that I want to repeat it. It describes the the last days of the Tulipomania bubble of the 1630s, as described in Edward Chancellor's 1999 book, Devil Take the Hindmost, a history of financial speculation:

"No actual delivery of tulips took place during the height of the boom in late 1636 and early 1637 as the bulbs remained snug in the ground. A market in tulip futures appeared, known as the windhandel (the wind trade): sellers promised to deliver a bulb of a certain type and weight the following spring, buyers took the right to delivery -- in the meantime, cash settlement could be made for any difference in market price. Most transactions were expedited with personal credit notes which also fell due in the spring when the bulbs would be dug up and delivered. Gaergoedt boasts of having made 60,000 guilders from his tulip speculations but admits that he has only received "other people's writing." By the later stages of the mania the fusion of the windhandel with paper credit created a perfect symmetry of insubstantiality: most transactions were for tulip bulbs that could never be delivered because they didn't exist and were paid for with credit notes that could never be honoured because the money wasn't there." (pp. 16-18)

This last sentence tells you exactly what CDOs have become. They're based on leveraged mortgage-based investments that no longer exist in viable form, and were paid for with other credit derivatives that could never be honored because they too were worthless.

But you don't own any tulip certificates, you say, and you don't own any CDOs either, so what do you care?

My response is: Yes you do, if not directly, then indirectly. There are tens or hundreds of trillions of dollars invested in these credit derivatives, in the portfolios of mutual funds, investment trusts, hedge funds, savings banks, pension funds, college endowments, money market funds, insurance companies, and so forth, meaning that in the next few months, millions of people are going to lose much of their life savings. And this is going on RIGHT NOW, not awaiting some other generational change. The panic has been going on for several weeks, and continues.

I've been telling people since 2002 that we're headed for a new 1930s style Great Depression, based on long-term forecasting techniques. I had no way of knowing what path we'd take to get there, and a lot of people thought I was loony, but there's never been any doubt that it was coming.

This is what I want to get through to you, Dear Reader. Even if you thought I was loony, this panic with CDOs is happening RIGHT NOW. Investors are getting increasingly panicky, and we're getting closer and closer to a new generational financial crisis, like the one that began in 1929.

From the point of view of Generational Dynamics, a generational stock market crash is overdue. If you go back through history, there are of course many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash. We're now overdue for the next one. It could happen next week, next month or next year, but it will come with absolutely certainty, and will come sooner rather than later.

I can't tell you when it will come, and I will admit that I've been fooled before when things seemed bad. But what I'm saying now, Dear Reader, is that the news in the last two weeks is VERY OMINOUS. And as I'm writing this, near midnight Eastern time, the Nikkei Index for the Tokyo Stock Exchange is down 400 points.

There's a pattern of increasing desperation among investors. Banks are being stuck with big loans, big deals are falling through, credit is tightening.

What I'm saying, Dear Reader, is that you have to prepare for this, and plan for it. Don't wait any longer. Put your affairs in order as well as you can. Don't spend a penny on anything that you don't absolutely need. That penny may save your life a year from now, or may save you or your daughters from having to go into a life of prostitution. Treasure the time you have left, and use the time to prepare yourself, your family, your community and your nation. (27-Jul-07) Permanent Link
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E-mail system down - please use alternate gmail address. (Interland) is getting worse and worse. Does anyone have any suggestions?

If you've sent me an email message in the last week, then it's possible that I haven't received it.

Right at this moment (Thursday afternoon), all e-mail messages to are being bounced, because of problems on their systems. This apparently has happened off and on for the last week.

If you send me an e-mail message, please copy it to the following gmail account that I've just set up: . That way, I'll get it one way or the other.

Also, you can use one of the "Comment" forms, such as the one on the right.


The service from the internet service provider (Interland) is getting worse and worse. I've been their customer since 2000, with good service until this year. Then, in February there was a major outage, and a couple of weeks ago they simply shut down my web site without notice, and were rude to me when I called customer service.

This is a company that appears to be falling apart.

Is there anyone out there who has some suggestions about what to do about this?

Don't forget -- if you send me e-mail, copy it to or I might not get it.


John (26-Jul-07) Permanent Link
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Iraq: Suicide bombers interrupt celebrations in Baghdad over soccer win

Iraq's stunning 4-3 soccer victory over South Korea in the Asia Cup semi-final puts it one game away from their greatest soccer achievement ever.

Minutes after the Iraq team clinched victory in the tense, nail-biting game, thousands of people began streaming out into the streets of Baghdad and other cities throughout the country, celebrating the victory. Sunnis, Shiites and Kurds all celebrated together, screaming with joy and jubilation.

However, the Baghdad celebrations were interrupted by two suicide car bombers who blew themselves up in the middle of the celebrating crowds, killing 50 and wounding 100 more.

Not surprisingly, the BBC on Wednesday led with the bombings, emphasizing the blood and gore. (Last week, the BBC newscast carried a 20-minute segment on bodies in the Tigris River, and described in precise detail how the police cut up the body, examine the stomach contents, and so forth. I would have thought that was over the top even for the BBC, but apparently I was wrong.)

The BBC played down the unity of the Iraqis, and played up the sectarian violence and so-called "civil war" aspect. The BBC blamed the suicide bombings on "the Sunnis," without mentioning al-Qaeda in Iraq.

I've been very critical of journalists and politicians because of their sheer stupidity and ignorance. This was shown by articles in the Congressional Quarterly. Washington journalists, analysts and politicians have no idea what's going on in Iraq. They don't know the differences between Sunni and Shi'ite, and up until recently they didn't know that al-Qaeda is operating in Iraq, or that al-Qaeda is a Sunni organization.

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What Iraqi Civil War?: Early in 2003, I predicted that there would be no popular uprising against the Americans, and that there would be no civil war. After the overthrow of Saddam, I said that an Iraqi civil war was impossible. Despite the constant near-hysteria of the politicians, journalists and high-priced analysts, I've been right so far. Here's why. (09-Apr-04)
Anti-Shi'ite Terror Attacks in Iraq, Pakistan: So far, Sunni and Shi'ite leaders in Iraq aren't taking the bait. (2-Mar-04)
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And Lawrence Kaplan, a senior editor at the liberal, pro-Democratic opinion magazine, The New Republic, wrote an article entitled "Congressional leaders are illiterate on Iraq," in which he basically reached the following conclusions about the Democrats in Congress: They're morons; they go out of their way to avoid learning anyting; they make up any "fact" they want as they go along, since they don't know anything; and they couldn't care less what happens in Iraq, since they just want votes.

And yet little ol' me, sitting in my apartment in Framingham -- I've known since 2004 that al-Qaeda was operating in Iraq, through Abu Musab al-Zarqawi. I've written about it many times since then.

When I wrote my comprehensive analysis, "Iraqi Sunnis are turning against al-Qaeda in Iraq," a few months ago, most journalists and politicians still were completely clueless about al-Qaeda in Iraq, even though Muslim sources were loaded with reporting on it.

The reason is because they assume that the Iraq war is just a replay of the Vietnam war in every detail. Actually the two wars have almost nothing in common, but the journalists and politicians are too stupid to figure that out.

Instead they call it a civil war simply because the Vietnam War was a civil war. I've explained dozens of times why the Iraq war is NOT a civil war and can't be a civil war, as you can see from the adjacent "related articles" box. But it makes no difference.

Things have changed in the last few weeks, because various military reports and intelligence estimates have been emphasizing al-Qaeda in Iraq. It's nothing that you didn't already know if you've been reading this web site, but now it's come to the attention of the politicians and mainstream journalists, and they have to deal with it.

It's been particularly galling to the New York Times. Incredibly, they refuse to acknowledge its existence, and the editors have distributed a secret internal memo telling its people to call it "al-Qaeda in Mesopotamia," rather than "al-Qaeda in Iraq." It's as if we're dealing with a bunch of petulant teenage girls instead of a major newspaper.

However, Wednesday's news about the celebrations after the soccer game shows how absurd the mainstream media explanation is. Sunnis and Shiites and Kurds were out in the streets celebratring together. People who hate each other and have civil wars with each other don't do that.

Shada Hassoun
Shada Hassoun

Also, this wasn't a unique event. Just two months ago, there was similar revelry among united Iraqis when sentimental Iraqi pop singer Shada Hassoun won the Arab "Idol" contest. Go back to that article and watch the video of Shada again. She's wonderful.

So, as I've written many times, the politicians and reporters have no idea what's going on in Iraq.

In the article that I wrote several months ago, I showed how Iraqis, including Sunni Iraqis, were turning against al-Qaeda in Iraq. Why? You can see why on Wednesday. There are no Iraqi suicide bombers, so the suicide car bombers that destroyed the revelry on Wednesday were foreigners, probably from Saudi Arabia, recruited by al-Qaeda. And they killed Iraqis -- ordinary Iraqi men, women and children. Why wouldn't the Iraqis turn against that? The claim that this can't be a civil war is obvious to everyone except the petulant teenage girls at the BBC, the NY Times, and, of course, in Congress.

Another dispute going on today is whether "al-Qaeda in Iraq" is really "al-Qaeda." President Bush says they're the same organization, and the Democrats say that the two organizations are completely unrelated to each other.

The truth is in the middle, but it's not even an important question. Al-Qaeda is turning into a kind of public relations "brand name" for Sunni Muslim terrorist groups stretching around the world from southeast Asia to the Mideast to the Mahgreb (North Africa) and up to Spain and France and Russia. Even if Osama bin Laden is not running al-Qaeda in Iraq, they communicate and share knowledge and resources. It makes absolutely no difference whether you call them the same group or different groups, because the effect is the same.

In fact, there's apparently a clear generational different between "bin Laden's al-Qaeda" and al-Qaeda in Iraq. A fascinating story came out of Yemen recently about the suicide bombings that killed Spaniards and Yemenis a few weeks ago in Yemen. An older al-Qaeda operative, now in custody, was insisting that the bombing was NOT the work of bin Laden's al-Qaeda, but rather was perpetrated by a bunch of younger generation al-Qaeda newbies who really don't know what they're doing. "The new generation is not the generation of Osama Bin Laden, it is the generation of Abu Musab Al Zarqawi, which is different from Al Qaeda, although the word al-Qaeda is used by some groups." Unfortunately, the article doesn't give enough details, but it's a juicy story anyway.

But it doesn't matter because they're both terrorist groups sharing resources with a number of common objectives. Two of the most important of these common objectives are (1) high-profile terrorist attacks on American soil, and (2) sparking an "Islamist revolution" in Pakistan or wherever it can be one, like the 1979 Islamist revolution in Iran.

This has been especially apparent since new hostilities broke out in Pakistan between government forces and al-Qaeda, resulting in an increasing level of conflict growing between Americans and Pakistanis. (26-Jul-07) Permanent Link
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Deals are collapsing as financial managers can no longer "make money"

New York stocks fell 1.5-2% on Tuesday, as "Mean Reversion" stunts earnings growth.

As second quarter earnings come in, it's becoming apparent that the Law of Mean Reversion is finally beginning to apply to earnings growth.

As I wrote in a 2005 article called "The 11% Solution," over the long term, corporate earnings grow at the rate of 11% per year. But since the mid-1990s, earnings growth has averaged about 18%. By the Law of Mean Reversion, that means that we have to have an equal number of years of near-zero earnings growth, to maintain the long-term average.

That was in 2005, but earnings growth averages have stayed in double-digits -- until this year. For the first quarter, earnings grew around 7%. We're now getting second quarter earnings announcements, and it appears that they're going to be averaging around 3%.

Leading the way in bad news was Countrywide Financial Corp., whose second-quarter profits were down 33%, because of surging mortgage foreclosures.

It's the double-digit earnings growth that investors used to buy more stocks, even though price/earnings indexes have been way above average since 1995.

But that wasn't the only thing to spook investors on Tuesday.

We have discussed currencies much lately, but it's worth pointing out that that the dollar has been falling rapidly on international markets. It's at its lowest level ever against the euro, and at a 26-year low against the British pound.

Let me just pause for a moment to discuss the two meanings of the word "inflation." If you read the papers, all that anyone seems to worry about is whether there's too much inflation, since too much inflation means that the Fed will have to raise interest rates, and that will make it harder to borrow money.

Actually, inflation is that big a problem. My prediction in 2003, based on long-term forecasting techniques, was that the Consumer Price Index (CPI) was at a secular high and that prices would fall by 30% by the 2010 time frame. That's still my prediction today, based on the scenario that an inevitable stock market crash and financial crisis will cause massive deflation.

This should hardly be a surprise, especially if you look at Japan. When their secular financial crisis and stock market crash began in 1990, prices started falling, and they experienced deflation for many years.

People only started seriously worrying about inflation during the so-called "Great Inflation of the 1970s." Even this phrase is something of a joke, because it parallels the "Great Depression of the 1930s." In the 1940s-70s, mainstream economists and pundits used to worry about a repeat of the Great Depression. Now they've decided that that can't ever happen any more, and they worry about inflation, and a repeat of the 1970s.

But it's easy to see that that concern is misplaced. Look at our experience since 2001. The Fed kept interest rates close to zero for several years. Mainstream macroeconomic theory, based on the 1970s experience, predicts that near-zero interest rates should have caused high inflation and a burst of new employment for several years. Instead, inflation has been extremely low, and unemployment has remained stubbornly high.

However, there are two different kinds of "inflation": Domestic inflation is measured by the CPI, and the international inflation is the value of the dollar against other currencies.

Mainstream macroeconomic theory says that these two measures of inflation should remain roughly synchronized. But they haven't.

The domestic inflation rate, as measured by core CPI, has been very low, almost deflationary. Internationally, the value of the dollar has been falling, which is an inflationary measure. The fact that these two measures have been going in different directions is another example of the failure of mainstream macroeconomics to predict or explain anything since 1995, and why it's necessary to integrate classical System Dynamics into macroeconomic models.

So the falling value of the dollar in international currency markets is another reason why investors are getting spooked.

But the third reason is at least equally worrying: The continued collapse of the market for credit derivatives -- especially "collateralized debt obligations," or CDOs.

You may recall that last year I told you how hedge fund managers "make money" -- and I mean that literally -- they actually create new money. Briefly, they start up a new hedge fund, based on underlying assets of any kind whatsoever, and then bid up the price of the hedge fund shares so that they're worth many times more than the value of the underlying assets. In essence, the hedge fund manager is "making money" -- literally, as if he had a printing press. The hedge fund shares can now be traded at their inflated values, so in some circles they're as good as money.

At least that's how I explained it last year. But now we can put things into a little better perspective.

The "underlying assets" that I mentioned above have turned out to be mostly these CDOs. The CDOs themselves had "underlying assets," namely the payments due from mortgages.

As foreclosures have surged, the CDOs have lost value, and the hedge funds based on them have collapsed, as happened last week when Bear Stearns announced that its hedge funds are almost worthless.

The collapse of the CDO market means that hedge fund managers are no longer able to "make money." They can't just issue some new hedge funds, get buyers, and use the assets to fund some other deal.

The result is that within the last month, it costs about 2% per year more to get financing for a deal. If the deal involves a few billion dollars, then 2% makes a huge difference.

That's why a huge deal involving General Motors collapsed on Tuesday. GM had agreed in June to sell their Allison Transmission unit to private equity firms for $5.6 billion. The deal would have required a $3.5 billion bank loan. A month ago, it would have been easy. Tuesday, it was impossible.

The GM deal is not unique. A Reuters article lists 24 such deals that have had to be postponed in July alone.

The deals involved a French insurer, a German truck parts supplier, an Austrian machine maker, the Russian state-owned oil firm Rosneft, a Dutch retailer, and many other firms around the world.

Why is this important?

It means that everything in the world is slowing down economically. If credit isn't available, then deals can't be made, products can't be purchases, and services can't be provided. Big firms and little firms, rich people and poor people, are finding it harder and harder to get money for the things they need, and this creates a domino effect.

When I predicted in 2002 that we were entering a new 1930s-style Great Depression, it was based on very general macroeconomic and generational considerations. I showed that the stock market was way overpriced, using long range financial forecasting techniques, and I showed that we were overdue for a generational financial crisis.

The last point is worth reviewing briefly again.

From the point of view of Generational Dynamics, a generational stock market crash is overdue. If you go back through history, there are of course many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash. We're now overdue for the next one. It could happen next week, next month or next year, but it will come with absolutely certainty, and will come sooner rather than later.

The 2002 prediction was really a "big picture" prediction, a macroeconomic prediction, a systems dynamics prediction, because it told you where we were going, but not what path we would take to get there.

Now, as the time approaches, we're looking more and more at the minute details. In 2002 I couldn't have told you that the CDO market would collapse, because 2002 was before the housing bubble, before the credit bubble, before the liquidity bubble, and before there was any real market for CDOs.

Today, the "big picture" prediction is exactly the same, but now we can be pretty certain of some of the details. We can see now that CDOs will play a big role. We can see that the Shanghai stock market bubble and the Chinese economy bubble will play a big role. And it's beginning to look like the falling US dollar value will play a role.

When historians look back at this time, they'll say, "It was all the fault of those darn CDOs and the Chinese. If it hadn't been for them, there wouldn't have been a crash."

But that's wrong. It's like saying that there wouldn't have been a World War II if there'd been no Hitler. Hitler didn't cause WW II; he was merely the actor that brought it about. But without Hitler, someone else would have done the same kind of thing.

The same is true of CDOs and the Chinese today. They aren't the cause of the financial crash, only the actors.

The financial crash is coming because all the people who survived the last crash (in 1929), and who survived the Great Depression of the 1930s, are gone. They've been replaced by new, younger generations of people with no fear of abusive credit practices and debauched economic practices. The new 1930s style Great Depression has to come -- not because of CDOs but because of Boomers and Generation-Xers. (25-Jul-07) Permanent Link
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Researchers solve the game of checkers (draughts)

We now know: With perfect play on both sides, the game is a draw.

Jonathan Schaeffer, a 50-year-old computer scientist from the University of Alberta, has written a computer program that plays a perfect game of checkers, and he's proven that he's done so.

You can play against Chinook, the checker-playing program by visiting its web site. There you'll also find sample games, move databases, history of the project, and Schaeffer's proof. However, the version of Chinook on that web site has reduced playing strength, so that you might have a prayer of winning the game if you're very, very lucky.

Although this is being hailed as a great achievement in Artificial Intelligence (AI), it's actually one more example of the total failure of AI as it was envisioned in the 1950s.

Actually, an AI pioneer named Arthur Samuel developed a pretty good checker-playing program in the late 1950s, running on an IBM 701 computer. The computer could play at near-master strength.

An innovative feature of Samuel's program was its ability to "learn." It would save positions it had seen before, along with the final result. It also played games against itself to build up its library of games. It would use that saved data to guide it in future games. In time, the computer program became a stronger and stronger player.

This was quite a remarkable thing in 1957, and researchers increasingly turned their attention to the game of chess, leading to this prediction by Herbert A. Simon and Allen Newell: "Within ten years a computer will be the world's chess champion, unless the rules bar it from competition."

The assumption was that AI researchers would figure out many clever new things, like the way they got the checkers program to "learn," and that by 1967, they would have found enough clever new things for the computer to be able to beat a human at chess.

The prediction didn't come true, of course. By the late 1960s there was a chess playing program available, written by Richard Greenblatt at MIT, that could play as well as a good amateur, but no better.

Last year, a computer did essentially become world champion, when the Deep Fritz computer beat world chess champion Vladimir Kramnik, by a score of 4-2 in a 6-game match.

Well, that was 40 years late, but better late than never.

What clever new things did the AI researchers have to figure out to make that computer a world champion? Virtually none. The Deep Fritz world champion chess program used the same algorithms as the amateur program from the 1ate 1960s. There's only one difference: Computers are faster. Since computers are faster, they can look ahead more moves, and compute more variations in a small amount of time.

The new checker champion carries this "brute force" technique to its ultimate limit. It uses virtually no clever AI things at all.

The new Chinook computer software was developed by letting super-fast computers run and compile a huge database of as many checker board positions as possible, along with the outcome of each position. When it plays a game, it simply looks up the current position in its database and plays the correct move. Some AI!

What's even more ironic is that the Chinook checker program "learned" in exactly the same way that the Arthur Samuel's 1957 program worked. It played against itself and built up a huge database of games and the best move for each one. The only difference is that computers are faster and data storage is larger.

In my 2004 article, "I, Robot is science fiction, but intelligent computers will soon be science fact," I mentioned that I had developed an intelligent computer algorithm that would allow a computer to be more intelligent than a human being.

How did I do that? I just used the same ideas that the chess and checker software programs use. A computer can understand what it sees and hears by matching up the sights and sounds with those stored in a huge database of sights and sounds, just like the checkers program looks up checkerboard positions in a database.

And the computer figures out what to do next by looking making a list of all the things it can do, then making a list of things that will happen in response for each one, then making a list of things that it can do in response to those, and so forth, evaluating huge numbers of "variations," just as the chess-playing program looks ahead at moves and counter-moves.

So, why don't we have computers that are smarter than humans today?

Because computers aren't fast enough yet. With 5-10 years, there will be computers fast enough to implement the above algorithm, those computers will become more intelligent than humans.

Just like the checker playing programs, these super-intelligent computers will "learn." But for these computers, "learning" will take (at least) two different forms: In one form, the computers will build up their databases of different situations and how to handle them, and the computers will share those databases with one another.

The second form is much more important. Intelligent computers will become physicists and engineers and inventors, and they will invent faster and faster computers that will become even more intelligent. That's when the Singularity will occur.

My estimate is that the Singularity will occur in the late 2020s. After that, the computers will be in charge, and the continued survival of the human race will be in doubt.

Does this worry you, Dear Reader? Then perhaps this F-Minus comic strip from Saturday's paper may cheer you up:

F-Minus comic strip, 21-Jul-2007
F-Minus comic strip, 21-Jul-2007

(23-Jul-07) Permanent Link
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Level of conflict growing between Americans and Pakistanis

Foreign minister Khurshid Kasuri says that Pakistanis are getting "angry" and "upset," following the criticisms and implied threats about terrorism that they've been hearing from Americans.

Frances Townsend, homeland security adviser. <font face=Arial size=-2>(Source:</font>
Frances Townsend, homeland security adviser. (Source:

Remarks of that kind came Sunday from Frances Townsend, President Bush's homeland security adviser.

"Job No. 1 is to protect the American people. There are no options off the table," Townsend said on Sunday. "No question that we will use any instrument at our disposal" to deal with al-Qaeda. She said that if the United States had "actionable targets, anywhere in the world," including Pakistan, then "we would pursue those targets."

Townsend's remarks cap a week of criticisms of increasing stridency coming from Washington and directed at Pakistan's president Pervez Musharraf.

The criticism follows a new intelligence narrative, put forth by Mike McConnell, the director of national intelligence, and other recent critics. Although the narrative has been put forth by analysts in the past, it's gained prominence recently because of Administration statements.

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Pakistan government crisis deepens, following Musharraf's resignation: The government is completely rudderless as suicide bombers shock the country.... (23-Aug-2008)
"The deal is done" for Pakistan's President Musharraf to resign: Pakistan looks into the abyss.... (15-Aug-2008)
CIA accuses Pakistan's ISI of aiding in Indian embassy bombing in Kabul: The level of Afghanistan - Pakistan - India tension has substantially increased... (3-Aug-2008)
Pakistan is paralyzed as Tehrik-e-Taliban advances in NorthWest: Pakistan army abandons negotiations for war to prevent imminent takeover of Peshawar... (29-Jun-2008)
Pakistan's tribal areas have become the world nerve center for al-Qaeda terrorism: Al-Qaeda now has "free reign" and "safe haven" in this region.... (6-Apr-08)
Review of recent international stories: Pakistan, Kosovo and Cuba in the news... (20-Feb-08)
Pakistanis are increasingly joining forces with al-Qaeda: The contrast with the Iraq war and al-Qaeda in Iraq is instructive.... (30-Dec-07)
Benazir Bhutto killed by suicide bomber after election rally in Rawalpindi: Here's what to watch for in the next few hours and days.... (27-Dec-07)
Pakistan on high alert after massive terrorist bomb kills 50 worshippers: Al-Qaeda and Taliban terrorists from Pakistan's Tribal Regions... (23-Dec-07)
Pakistan is suspended from the British Commonwealth of Nations: Once upon a time, long, long ago, there was a British Empire.... (24-Nov-07)
Sunni/Shia violence increasing in Pakistan tribal areas as Taliban gains strength: The Pakistan army is massing for an assault against Taliban in Northwest... (19-Nov-07)
Tense Pakistani president Musharaff calls for elections by January 9: After the embarassingly small turnout by Benazir Bhutto supporters on Friday,... (12-Nov-07)
Risk of Pakistan meltdown increases as Musharaff clamps down: We're raising the "conflict risk index" for Kashmir from 2 (medium risk) to 3 (high risk).... (6-Nov-07)
Pakistan President Pervez Musharraf declares martial law and a state of emergency.: In a highly dramatic televised speech to the nation and the world,... (3-Nov-07)
Benazir Bhutto narrowly escapes death from suicide bombers: Pakistan is adrift and at a crossroads today, as its people wonder where to go next.... (21-Oct-07)
Level of conflict growing between Americans and Pakistanis: Foreign minister Khurshid Kasuri says that Pakistanis are getting "angry" and "upset,"... (23-Jul-07)
Pakistan's High Court hands President Musharraf a humiliating defeat: Musharraf's government is in question at a time when al-Qaeda violence in surging in Pakistan.... (21-Jul-07)
Pakistan violence from al-Qaeda and Taliban is increasing: Al-Qaeda and Taliban militants on Afghan border are seeking revenge for Red Mosque attack.... (16-Jul-07)
Pakistan: Over 106 dead in spectacular assault on radical mosque in Islamabad: Radical students hoped to spark an Islamic revolution against Musharraf.... (12-Jul-07)
Riots in Karachi, Pakistan, threaten Musharraf's presidency: Thirty people were killed and hundreds were injured on Saturday... (13-May-07)
Pakistan's President Musharraf faces major crisis : The remarkable détente between India and Pakistan may go down with Musharraf. ... (18-Mar-07)
Al-Qaeda resurging in Afghanistan and Pakistan: Al-Qaeda's greatest threat is to Britain and Europe.... (19-Feb-07)
India claims Pakistan government agency perpetrated the Mumbai railroad bombings: India has promised to show potentially explosive evidence to Pakistan.... (1-Oct-06)
Tensions build as Pakistan cracks down on extremists after London bombings: In Kashmir, a car bomb that kills and wounds dozens, including children,... (21-Jul-05)
"Koran in toilet" rumor is uniting Muslims around the world: From Gaza to Indonesia, Muslims are shouting "Death to America."... (15-May-05)
Pakistan "Black Day" protests fail: Continuing a worldwide trend of increased militarization and police power, President Pervez Musharraf... (02-Jan-05)
China's "sacred responsibility" is to stop Taiwan independence by force: A national defense white paper issued Monday by China threatens... (28-Dec-04)
An eerie parallel between Pakistan and Israel: Pakistani President Pervez Musharraf has proposed a Kashmir peace plan which, like the Mideast "Roadmap to Peace," has no chance of succeeding.... (29-Oct-04)
New Islamic terrorist group claims credit for Bangladesh bombing leading to massive unrest and further violence: Like Pakistan, Bangladesh is overwhelmingly Muslim but still has excellent relations with the U.S.... (25-Aug-04)
Beheadings part of increasing conflict level throughout Mideast: The level of conflict is increasing throughout the Mideast, from Gaza to Pakistan, from Saudi Arabia to Uzbekistan. (23-Jun-2004)
Anti-Shi'ite Terror Attacks in Iraq, Pakistan: So far, Sunni and Shi'ite leaders in Iraq aren't taking the bait. (2-Mar-04)

According to McConnell,

The remarks by Townsend that American armed forces might pursue targets in Pakistan, following on the heels of this narrative by McConnell, is infuriating the Pakistanis.

Pakistan Foreign minister Khurshid Kasuri <font face=Arial size=-2>(Source: CNN)</font>
Pakistan Foreign minister Khurshid Kasuri (Source: CNN)

Here's what Pakistan's Foreign Minister Khurshid Kasuri said on Sunday on CNN:

"The Pakistani military is already there in the tribal area. ...

Pakistan's commitment cannot be doubted by anybody, and that is why some of our people do not like what we read in some of your newspapers, which are more like leaks and calculated leaks. And we hear of safe havens in Pakistan.

It really makes us very angry when we are suffering so many casualties, when our troops are suffering so many casualties. You know, I know you're a friend, but the way you frame your question is something that people in Pakistan don't like. ...

All I'm saying is this: I am not trying to underestimate the situation. I know it's a difficult situation. We've suffered casualties in the last three days. What we need is actionable intelligence. We do not want, you know, something said just for the purpose of having an effect on American public opinion.

Now, I want to say one thing very clearly. The whole purpose of this exercise: to win hearts and minds of the people. Now, we are aware of that, and we have to carry our public opinion with us. And here is a figure which I would like you and the American audience to ponder over. Look at the ratio of casualties between your troops and Iraqi civilians.

And do you know what our casualties have been? When 500 or 600 of our soldiers died -- and I'm talking the past year and not the recent ones -- we were able to get hold of about 800 or 900 fatalities by the militants. Which means the ratio is 1:1.2, whereas the ratio in Iraq, I do not even wish to mention.

The difference is that we cannot afford what is conveniently called collateral damage. We have committed to controlling terrorism. We have demonstrated that at the time of Lal Masjid, recently, the Red Mosque, and it lasted over six months. We've tried our best to save human lives. It was only as a last resort that force was used.

And people in Pakistan get very upset when, despite all the sacrifices that Pakistan has been making, you know, you have the sort of questions that are sometimes asked by the American media.

And as far as the media is concerned, I don't wish to be more frank that I'm going to be in this interview. We heard a lot of what was said before the Iraq war. A lot of newspapers now have been gracious enough to admit that they made certain mistakes. Maybe they are making bigger mistakes at this moment."

These remarks are exceptionally strong in the world of international diplomacy, and the represent a significant heightening of tension between America and Pakistan.

From the point of view of Generational Dynamics, there's no doubt in my mind that President Musharraf is underappreciated in America. I've expressed my admiration many times for both him and India's prime minister.

India and Pakistan are both nuclear powers, and they almost went to war in 2002, but they drew back, thanks to a remarkable détente that Pakistan's President Pervez Musharraf and India's Prime Minister Manmohan Singh have engineered over the last few years.

Musharraf, born 1943, and Singh, born 1932, are both survivors of World War II and the subsequent genocidal war between Pakistan and India over Kashmir and Jammu, a dispute that still seethes today, even though the United Nations partitioned the region into Indian and Pakistani regions in 1947.

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

As survivors of the last crisis war, both men have spent their lives doing everything possible to guarantee that their children and grandchildren will never have to go through any similar experience. This explains why Singh and Musharraf pushed so hard, and succeeded in forging the détente between the two countries, and have maintained peace, so far, over Kashmir and Jammu.

But as is always the case with Generational Dynamics, it's not politicians that matter, but changes in the attitudes and behaviors of masses of people are very important.

This startling statement by Pakistan's foreign minister indicates that some things are changes. This could be a blip that will disappear, or it could be the beginning of a major new series of confrontations between America and Pakistan.

As I've said in the past, we can be certain that a Clash of Civilizations world war is coming, but we don't know the road that we'll travel to get there. In particular, we can't be entirely certain who'll be allies of whom. Nonetheless, my expectation is that America will be aligned with Japan, India, Russia and the UK, and that the new axis will begin with China and Pakistan. What we're seeing now might be the first step in that direction, or things may take a different turn. Only the Clash of Civilizations world war is absolutely certain. (23-Jul-07) Permanent Link
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Pakistan's High Court hands President Musharraf a humiliating defeat

Musharraf's government is in question at a time when al-Qaeda violence in surging in Pakistan.

First, it's important to understand that the hatred being directed against Pakistan President Pervez Musharraf is extremely intense, comparable to the hatred that's been directed at leaders of other countries in generational Crisis eras -- George Bush, Tony Blair, Ehud Olmert, and increasingly toward Nicolas Sarkozy, for example. And in China, with tens of thousands of regional anti-government riots occurring every year, the hatred of Hu Jintao must be enormous. This same hatred was directed at American presidents in previous Crisis eras -- by the Republicans against President Franklin Roosevelt, and by the Democrats against President Abraham Lincoln. It's just what always happens.

And just as rhetoric directed at George Bush today can only be described as fatuity bordering on gibberish, the same quality of rhetoric is being directed at Musharraf. That's why it's difficult to discern what's going on from someone like myself, writing on a computer halfway around the world.

Shortly after they began, I reported on the riots against Musharraf by lawyers, after his March 9 suspension of the country's Chief Justice Iftikhar Muhammad Chaudhry. Chaudhry then became the symbolic leader of the opposition to Musharraf.

Rioting lawyers, complete with suits and ties, in Islamabad, Pakistan, on March 18 <font size=-2>(Source: BBC)</font>
Rioting lawyers, complete with suits and ties, in Islamabad, Pakistan, on March 18 (Source: BBC)

Now frankly, I thought at the time and still think that this is something of a big joke. It's one thing when you have demonstrating college students or rioting Islamists, but when you have a bunch of lawyers in suits and ties running around with their hands in the air, complaining about the government, then you know that you've entered a very special cartoon world. (However, an online correspondent from Karachi tells me that many of the "lawyers" you see on TV in these demonstrations are actually ordinary people dressed as penguins to look like lawyers.)

Nonetheless, Friday's decision by Pakistan's High Court to completely reverse Musharraf's decision is being called "historic" and a "landmark verdict" and the "birth of a new Pakistan." It's the same kind of fatuous rhetoric we heard over here when Scooter Libby was found guilty.

What makes the situation very dangerous, however, is the parallel development of surging al-Qaeda violence throughout Pakistan, following the the spectacular assault on radical mosque in Islamabad, Pakistan's capital city.

It now appears increasingly likely that the entire Red Mosque confrontation was purposely set up by al-Qaeda agents to energize al-Qaeda militants, and even draw them into Pakistan from Saudi Arabia, Iraq and Saudi Arabia.

According to an article by Debka, which has contacts within Israeli intelligence but often gets things wrong, al-Qaeda ordered the Red Mosque confrontation and resulting violence because the Pakistan army was close to capturing Osama bin Laden and his second in command, Ayman Zawahiri. My attitude toward this sort of thing is like everyone else's: I'll believe it when I see it.

However, there's no doubt that violence from al-Qaeda and Taliban has been increasing, especially in the tribal regions in North Waziristan (adjacent to Afghanistan), where tribal leaders have torn up a so-called "peace treaty" that they signed with the government last year, and have essentially declared war on the government.

During the last week, a series of daily bomb attacks has killed more than 200 people.

The suicide bombings have occurred in Waziristan and in Islamabad itself, but they've spread as far as the southwest, where suicide bombers attacked a convoy of Chinese workers, killing at least 27 Pakistanis.

The result is a major political crisis for Musharraf, who is facing reelection later this year. The Chief Justice confrontation has energized the political opponents, and the Red Mosque confrontation has energized the Islamist terrorists.

As I've said before, Musharraf's position in Pakistan is a major stabilizing factor in the region, and this is strongly affected by the fact that Musharraf was born in 1943, and has personal memory of World War II and the violent genocidal war between India and Pakistan that ended in 1947 without ever being really settled.

If Musharraf disappears, for whatever reason, then he will be replaced by someone from a younger generation who will be much more militant towards India, and the short-term probability of nuclear war between India and Pakistan will increase substantially.

Generational Dynamics predicts there will indeed be a new genocidal crisis war between India and Pakistan, and since both countries possess nuclear weapons, there's little doubt that they will be used. It's impossible to predict when such a war would begin, but if Musharraf disappears and is replaced by someone from a younger generation, then a major confrontation could develop quickly. (21-Jul-07) Permanent Link
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China's economy and trade surplus surge even more explosively

Once again, mainstream macroeconomics failed to predict or explain what's going on.

China's annual growth rate has been above 9% since the early 1980s. In the last five years or so, the Chinese have been using various macroeconomic techniques to "cool down" the economy. Each year, Chinese officials promised that the growth rate would slow down to 6-7% the following year.

Now the Chinese Ministry of Commerce announces that the economy is growing "at a blistering pace."

The Chinese economy rose at an annual rate 11.5% in the first half of 2007. According to Chinese officials, it continued on a "sound and rapid" path which needs some "adjustment." However, the announcement doesn't mention that these are the same "adjustments" that they've been trying for a number of years now.

From the point of view of Generational Dynamics, the entire Chinese economy is unraveling. It's in a huge economic bubble, where hundreds of millions of people have "bet" -- by investing in the stock market or by spending a lot of money or by taking marginal jobs -- that the economy will continue growing at that rate. A slowdown in the economy will not be a "soft landing," as hoped, but will be a crash that will pull those millions of people down with it.

China's trade surplus was $112.5 billion in the first half of 2007, up 84 per cent from the first half of 2006. China's foreign reserves are the world's largest at $1.3 trillion at the end of June.

The Miyanville blog has prepared a table of the growth of China's foreign reserves for the last few quarters:

2005 4th quarter Up +$  49.9 billion
2006 1st quarter Up +$  56.2 billion
2006 2nd quarter Up +$  66.0 billion
2006 3rd quarter Up +$  46.8 billion
2006 4th quarter Up +$  78.4 billion
2007 1st quarter Up +$ 135.7 billion
2007 2nd quarter Up +$ 130.6 billion

There's no explanation for this kind of explosive growth in mainstream economics. These figures are a surprise to "experts," who did not predict them, and can't explain them now.

Generational Dynamics explains what's happening as following: China had a major national financial crisis that began in 1932, and triggered Mao Zedong's 1934 Long March, followed by a 16 year civil war.

Just as America's dot-com stock market bubble of the 1990s began at exactly the time that the survivors of the 1929 stock market crash all disappeared (retired or died), all at once, China's bubble economy began in the early 2000s, just at the time that the survivors of the 1932 financial crisis all disappeared, all at once.

The entire Chinese population is in this younger generation. Like America's Boomers and Gen-Xers, the Chinese believe that there is nothing to fear from debt and that nothing can ever go wrong for very long.

That's why major financial crises always occur every 70-80 years -- the length of a human lifetime. The next bubble begins when the people who lived through the last bubble and crash all disappear, all at once.

This week's announcement by Bear Stearns announcement that its $12 billion hedge fund investments are now almost worthless was the latest of many shocks and imbalances in the American economy, and is a sign that America's credit bubble is coming apart at the edges.

A few days ago I wrote that food prices have been growing explosively, so much so that they appear to have reached some kind of "tipping point."

The same is true of those foreign reserve figures listed above. The growth rate is so enormous, that it's mathematically impossible that it be sustained for much longer. (20-Jul-07) Permanent Link
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Bear Stearns announces that its hedge funds are almost worthless.

And that was AFTER all 15 ABX indexes had already collapsed to new lows.

The defaulting hedge funds that almost caused a broad market meltdown a few weeks ago are now almost worthless, according to a letter that the company sent to its investors on Tuesday afternoon.

The hedge funds are based indirectly on money earned from collateralized debt obligations (CDOs) and other credit derivatives based on mortgage payments made by individual homeowners across the company. As mortgage foreclosures have surged across the nations, the values of the CDOs have been falling, forcing the hedge funds to fall in value.

According to a faxed copy of the letter, appearing on the Wall Street Journal web site, one of the hedge funds has "very little value," and the other has "effectively no value left." Here are some excerpts:

"Let me take this opportunity to provide you with an update on the status of the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds managed by Bear Stearns Asset Management (BSAM). A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the Funds. This process has been much more time-consuming than in prior months due to increasingly difficult market conditions.

[[Notice the names of these funds. Imagine what a Very Important Person you'd have to be to own shares in the High-Grade Structured Credit Strategies Enhanced Leveraged Funds. Wow! Just mention that name to a girl and you'd have her in bed before you reach the word "Funds." Too bad though, 'cause you're getting screwed in other ways as well.]]

As you know, in early June, the Funds were faced with investor redemption requests and margin calls that they were unable to meet. The Funds sold assets in an attempt to raise liquidity, but were unable to generate sufficient cash to meet the outstanding margin obligations. As a result, counterparties moved to seize collateral or otherwise terminate financing arrangements they had with the Funds. During June, the Funds experienced significant declines in the value of their assets resulting losses of net asset value. The Funds' reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities.

Fund managers and account executives have been informing the Funds' investors of the significant deterioration in performance for May and June. The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. in light of these returns, we will seek an orderly wind-down of the Funds over time. This is a difficult development for investors in these Funds and it is certainly uncharacteristic of BSAM's overall strong record of performance."

Separately from the letter, Reuters learned that the value of the High-Grade fund is about 9 cents on the dollar.

This must be a disaster to the investors who had each invested millions or tens of millions of dollars in the fund. Even after the Bear Stearns debacle in June, investors were still hoping to get 50 cents on the dollar, but now are learning that they'll get next to nothing. I wonder how many people learned on Tuesday that they've lost their life savings?

News of letter came after the market closed on Tuesday, which means that the results weren't reflected in the ABX index values for the day.

Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 17, 2007 <font face=Arial size=-2>(Source:</font>
Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 17, 2007 (Source:

There are 15 ABX indexes, representing mortgages from before 2006 (06-1), before the second half of 2006 (06-2) and before the first half of 2007 (07-1); for each of those time periods, there are five quality ratings from the lowest (BBB-), representing the weakest subprime mortgages, where foreclosures are most likely, to the highest (AAA), representing the strongest and most creditworthy mortgagees, for a total of 15 different indexes.

By the time that the market closed on Tuesday, and before the letter was disclosed, 14 of the 15 ABX indexes has fallen to their lowest values ever. (The remaining one is very close to its lowest.)

Tuesday's news from Bear Stearns means that the indexes still have a lot farther to fall.

If you look at the two graphs, you'll see what a "crash" would look like if they were graphs of a stock market index.

Last week I described three global economic imbalances that could trigger a major international financial crisis:

The second and third of these situations will not happen until there's an investor stock market panic. But the first of these is already in progress, and is continuing to spread to other markets.

From the point of view of Generational Dynamics, a generational stock market crash is overdue. If you go back through history, there are of course many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash. We're now overdue for the next one. It could happen next week, next month or next year, but it will come with absolutely certainty, and will come sooner rather than later. (18-Jul-07) Permanent Link
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The global warming fad is becoming the enemy of food production.

Food prices are continuing to increase sharply around the world.

Josette Sheeran, the director of the United Nations World Food Program (WFP), says that rising food prices are forcing it to cut back on programs to feed the poor.

"We face the tightest agriculture markets in decades and, in same cases, on record," said Sheeran in an interview with Financial Times. Noting that global wheat stocks have fallen to the lowest level in 25 years, she said, "We are no longer in a surplus world."

The WFP said its purchasing costs had risen "almost 50 per cent in the last five years," and that the price it pays for maize had risen up to 120 per cent in the past sixth months in some countries.

Actually, there have been plethora of news stories recently about food prices rising steeply around the world.

Sunday's Boston Globe says that Boston milk prices soared to their highest level ever this month as tightening national and world markets for dairy products pushed up the cost of cheese, yogurt, ice cream, chocolate, and even pizza.

According to the article, the price of a gallon of milk is $3.90, up 25 cents from a month ago, and 92 cents over the past year.

According to the latest American Farm Bureau Federation Marketbasket Survey, food inflation is up about 4% in the second quarter, and nearly 8% year-over-year.

Corn prices worldwide have risen about 60%, and wheat prices have risen 50%, according to Financial Times. Sugar, milk and cocoa prices have also surged, with food inflation the highest in three decades.

This has triggered a a stark warning from Peter Brabeck, chairman of Nestlé, the world's largest food company. In an interview, he said that "significant and long-lasting" food inflation will continue. He listed several major long-term and structural issues that contribute to this: Increased demand from China and India, and the use of crops for biofuels.

Biofuels? It's becoming a major factor in food prices.

Four countries are leading the charge for biofuels or "agrofuels": US, Brazil, Europe and China. Last year more than a third of the total US maize crop went to ethanol for fuel, a 48% increase on 2005. Brazil and China grew the crops on nearly 50 million acres of land. The increasing use of crops for fuel is taking land out of food production, and increasing food prices.

This has created some international political infighting.

Brazil is the world's largest exporter of ethanol, and President Luiz Inácio Lula da Silva says that he wants Brazil to do even more.

Business Week says that money is flying into Brazil to get on the biofuel train. Investors, including George Soros, are eager to put money into biofuel firms, and are expecting big returns.

Brazil's agribusiness is growing rapidly by any measure. Foreign agricultural exports grew 25% in the first half of this year, compared to the same period last year.

Brazil's president Lula believes that the growth in agricultural exports, especially ethanol, is the key to gaining clout and power for Brazil on the world stage.

"Brazil has already consolidated its position as the agriculture supplier of the world," according to a Brazilian trade official. "Now I think the Brazilian government sees ethanol as an instrument to make other countries pay attention to us, as a supplier of both food and energy."

In fact, Brazil is pretty much the only country in the world whose agricultural output is growing at all. Why? Because they've been cutting down the rain forest, clearing the way for more farm land and more food production. Since the 1970s, the Brazilian Amazon has lost more than 270,000 square miles of forest.

Now, this is a very sore subject with the Europeans, who enjoy taking having highly moralistic values, as long as those standards are applied only to other people, not themselves. (This is an allusion to the Kyoto protocol treaty, over which they regularly pummel the US for refusing to sign it. They signed it, but they don't abide by it. It's a joke.)

The Europeans are accusing are accusing Brazil of going on this program at the expense of cutting down its rain forests.

President Lula responded sharply: "We have adversaries that will make up any kind of slander against the quality of ethanol and biodiesel." Referring to a recent European conference where the deforestation issue arose over the use of sugar cane for biofuels, "I told them the Portuguese, who arrived in 1500, introduced sugar cane 470 years ago and it didn't reach the Amazon for a simple reason -- the temperature isn't suitable."

He added, "Brazil should not be afraid of this debate, we won't again accept the cartel of the powerful trying to stop Brazil from developing."

So, we have a beautiful irony, a conflict between the "global warming" fad and feeding people. We have the hypocritical Europeans getting into high dudgeon with the Brazilians, and President Lula calling their bluff. It's a sight to behold.

Putting up this web site and writing articles for it has lead to some fascinating insights that I couldn't have learned any other way. One of those issues is how emotional the food issue is.

Ever since I wrote my first article on the subject of food and population in 2004, I've had five or six online conversations with people on this subject that ended badly. People just really freak out on this subject.

It's as if they're saying to me, "A world war? Ha, ha! We always have wars. That's nothing. A stock market crash? Ha, ha! Everyone says that. Don't take it seriously. We're running out of enough food to feed people? WHAT??? ARE YOU CRAZY??? THEY SHOULD LOCK YOU UP AND THROW AWAY THE KEY!!!" One woman ended the conversation by saying that she thought that I already must be dead. Whew!

Nonetheless, from the point of view of Generational Dynamics, it's increasingly clear what's going on.

After WW II, there was a concerted effort to make sure that everyone would eat, because it was recognized that poverty and starvation were one of the major causes of the war. There was the Green Revolution that brought the latest agricultural technology to countries around the world, especially India. And there have been programs like the U.N. World Food Program that purchases food for needy people.

But the problem is that the population grows faster than the food supply. You can see this from the fact that food prices around the world have been increasing faster than inflation since 2000, and they've really skyrocketed since 2004.

What I believe has happened is that the "Green Revolution" ran out of steam around the mid-1990s, and population growth has been rapidly overtaking food production since then.

As one article after another has been appearing on increasing food prices, it's almost beginning to appear that some kind of "tipping point" has been reached, and worldwide food prices are really becoming uncontrollable.

Whatever the causes are -- and according to the president of Peter Brabeck,chairman of Nestlé, the causes are "significant and long-lasting," this will turn out to be one of the leading reasons why we're headed for a Clash of Civilizations world war. (16-Jul-07) Permanent Link
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North Korea shuts down nuclear reactor.

North Korea's Yongbyon nuclear facility was closed on Saturday, and international inspectors returned to the site for the first time since being asked to leave in 2002.

North Korea did this according a February agreement with America, South Korea, China, Russia and Japan.

In return for the closure, North Korea got $25 million and the first tanker of a promised million tons of fuel oil.

As I wrote at the time, count me among those who are extremely skeptical of North Korea's intentions. Yeah, they shut the nuclear facility down, but they can turn it right back on if they want to. And anyway, they're thought to have enough nuclear fuel stashed away for 5-10 more nuclear weapons.

The next step that the North Koreans promised is to dismantle the facility. Let's see if that happens.

From the point of view of Generational Dynamics, North Korea is in a generational Crisis era and has become increasingly xenophobic, as do all countries in generational Crisis periods. The distrust of America, South Korea and Japan in particular almost guarantees that they'll take no steps at denuclearization that aren't forced on them. (16-Jul-07) Permanent Link
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The sexual revolution is on in Vietnam.

In a city that the residents still call Saigon, as well as in Hanoi, there's a sexual revolution blooming that's being compared to the sexual revolution in the United States in the 1960s and 1970s.

That comparison is no coincidence. Gender issues and women's rights are usually a part of any generational Awakening era, which comes to any country one generation past the end of the previous crisis war. Vietnam is one generation past the war with the war with America and the civil war between North and South, and America in the 1960s-70s was one generation past the end of WW II.

Young couples are parking in lover's lanes or necking in the park, or living together, or making online connections with each other over the internet. Undoubtedly there have always been extramarital affairs, but now they're more openly discussed in phrases like "Rice six days a week and pho (noodle soup) on the seventh."

Hanoi, in North Vietnam, is the capital city of Vietnam. Saigon, used to be the capital of South Vietnam, but after America and the South lost the war, Saigon was renamed Ho Chi Minh city, after the revolutionary leader of North Vietnam.

North and South Vietnam have had different ethnic origins, with North Vietnam (Vietnamese Kingdom) originally populated by ethnic Chinese, and South Vietnam (Champa Kingdom) populated by Polynesian settlers from Indonesia and Malaysia. These ethnic differences have resulted in one crisis war after another over the centuries. The one preceding the 1970s war was the French conquest of Indochina in 1865-1885. Ho Chi Minh came to prominence as a Communist leader in the Awakening era the followed the 1880s war.

Old rivalries between North and South are awakening again, as was shown last November, when the South Vietnamese warmly welcomed a visit by George Bush, goading the Communists in Hanoi. From the point of view of Generational Dynamics, these rivalries will turn into a new conflict within decades.

For the time being, though, the Vietnamese can just enjoy love in bloom. (16-Jul-07) Permanent Link
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Pakistan violence from al-Qaeda and Taliban is increasing

Al-Qaeda and Taliban militants on Afghan border are seeking revenge for Red Mosque attack.

Tribal leaders in Waziristan in Northwest Pakistan tore up a peace pact with Pakistani president Pervez Musharraf and launched suicide attacks and bombings that killed at least 70 people, in a dramatic escalation of violence in the al-Qaeda infiltrated region. This is the region on the border between Pakistan and Afghanistan, where Osama bin Laden is assumed to be in hiding.

This region has been a hotbed of terrorism since before 9/11, when bin Laden had his training camps there. The Afghan war flushed most of the Taliban and al-Qaeda out, causing them to flee over the border into Pakistan.

The U.S. military has no permission to cross into Pakistan to chase after the terrorists, but Musharraf promised to take care of them with his military. After several military setbacks, Musharraf agreed in mid-2006 to withdraw the military, on the promise of the tribal chiefs to wipe out al-Qaeda and the Taliban in their provinces.

Since then, al-Qaeda has been resurging on the Afghan-Pakistan border, as has been repeatedly reported by CNN terrorism expert Peter Bergen.

The peace agreements were never going to last anyway, but the Red Mosque attack in Islamabad has provided an excuse to tear up the agreements once and for all.

As I wrote last week, the Sunni terrorist groups (Taliban and al-Qaeda) are hoping to spark an "Islamic revolution," similar to what happened in Iran in 1979. With 60 years having passed since the end of Pakistan's last generational crisis war, a new crisis war is certainly a possibility. But even if it begins as an "Islamic revolution," if it happens it will evolve quickly into an inter-tribal war that will spread to India and lead to a new Pakistan/India war. (16-Jul-07) Permanent Link
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Wall Street stocks hit fresh record highs again

All it took was some more bad economic news.

On Thursday, stocks reached new highs on economic news that "wasn't so bad."

On Friday, stocks reached new highs on economic news that WAS bad.

For example,

Wall Street investors now believe that they're completely immune to everything. It's like they believe that they've taken some injection that innoculates them against any stock market loss whatsoever.

On Monday, Citigroup’s chief executive, Charles O. Prince, says that he's still going full steam ahead with credit and leveraged deals. He said, "As long as the music is playing, you’ve got to get up and dance. We’re still dancing."

Well, apparently everyone's dancing on Wall Street.

A few months ago, I was writing about China's skyrocketing trade surplus and the Shanghai stock market bubble. I said that American investors were showing at least a tiny bit of sense because they do have some kind of national memory of the 1929 crash and the Great Depression of the 1930s. I wrote that "China is different. The Chinese people apparently have NO IDEA what's about to happen to them."

Well, I really have to take that back. Wall Street investors are now fully as manic as Chinese investors. Wall Street investors, like Chinese investors, are running as fast as they can, following each other like lemmings as they head for the edge of the cliff. (Ironically, the story about lemmings following each other off a cliff isn't true; lemmings are smart enough not to do that. It's only today's investors who are so stupid that they do it.)

As I've said many times, once the crash occurs people will be looking around for other people to blame. I may not be immune to that myself: The mythical Cassandra was able to foresee the future, but was cursed by not being believed. After her prophecies came true, she was reviled and raped. That's what happens even to innocent people after a disaster. That fact that this is the only web site in the world that's accurately predicted the world situation for five years has never brought me anything but grief up till now, and probably won't bring me anything but grief in the future.

Ratings agencies (S&P, Moody's, Fitch) are increasingly being blamed for the subprime mortgage security disaster. They're scrambling to point out the small print in their contracts where they say, "We're giving you ratings, but we're not promising anything."

Ordinary financial advisors are doing the same thing, saying that they give advice, but the fine print says that they're not responsible for what happens.

But it doesn't matter. All of these people are going to be blamed, and some may even go to jail.

Friday's Wall Street Journal has an article about Bear Stearns chief analyst, Gyan Sinha. It seems that in February he hosted a conference call for 900 investors, and told them that the market had overreacted, and that it was time to buy mortgage-backed securities again.

Now he claims that he was trying to give investors a "frank sense of the underlying value of the mortgage securities" and that his research wasn't intended as "a prediction of where the index would trade in the future based on technical or other market forces." Funny, I'll bet a lot of those 900 investors hadn't read that fine print before the conference call.

I remember quite vividly what happened in 2001 after the Enron debacle (but before 9/11). People were screaming for the jailing of EVERY CEO in the country, whether they were guilty or not. It was like the French Revolution, where anyone even distantly acquainted with an aristocrat was hauled off by the crowds, given a quick trial, and sent to the guillotine, where their heads were mercifully chopped off.

Another analogy is the Iraq war. In 2002, everyone was in favor of the war. After it started, everyone cheered the victories. Today, things haven't gone well, and the thing that everyone cheered just a few years ago is now the greatest crime in history. That's the way that people are.

My expectation is that the people who are going to be severely blamed are those who had a vested interest in giving people advice that turned out be wrong, and thus made money by giving wrong advice. For example,

Well, you get the idea.

But it goes a lot farther than that.

In that same article about the Shanghai stock exchange, I wrote about the xenophobia in Congress, causing congresspersons to irrationally blame the Chinese for America's debauched credit binge.

In other words, the American Congress is blaming the Chinese for America's economic troubles, just as investors are blaming the ratings agencies.

And in return? Here's an article by the mysterious Chan Akya, entitled "The Robber of the Century. (And to think, the century has hardly begun!)

According to Chan, Asians are going to lose a great deal of money because of the mortgage-based securities shakeout, and Americans won't suffer at all, and it's all the fault of America and the ratings agencies:

"What happened this week was a result of the prices of mortgage securities falling sharply in the past few weeks. Finally on Wednesday, the rating agencies moved to cut ratings of more than $12 billion worth of bonds. This forced the "hogs" mentioned above to sell their bonds into a market that was already nervous about further weakness in the US economy.

The result was, of course, carnage. Being unable to sell all the securities they had, many of the investors had to sell other securities, including corporate bonds hitherto unaffected by the rating moves.

The immediate question arising from the rating agencies' action focuses on timing. Why did they downgrade this week, based on information that had been available since February? The reason, of course, goes back to the conflict of interest - if agencies admitted that their ratings criteria were wrong, they would lose a lot of business. Indeed, financial newspapers have been pointing out over the past few weeks that smart investors such as hedge funds have been "short" the stock of rating agencies (or their holding companies) for precisely this reason.

As alluded to above, we can see that the extra time gave the big investment banks the opportunity to get rid of their existing positions, most often to big central banks around the world. We will know how much these banks lost, especially in Asia, only over the next few years rather than weeks.

Next steps

The subprime banana skin has thus claimed a number of victims, including Asian central banks that are forced to hold billions in US dollar securities because of their currency manipulation that pushes up reserves. It almost seems poetic justice that the manipulators are given losses by the very people they think they are helping, namely over-consuming Americans.

I believe that forced liquidation of many portfolios in Asia will create further losses, but American borrowers will emerge in essence unscathed from all this. Holders of mortgage securities do not have any claim on the underlying assets, only on the intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue. Unlike in previous crises such as that involving the telecom sector in 2002, most of the losses will be absorbed by central banks around the world rather than North American or European commercial and investment banks.

This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis in the next few years, but nothing can be done about it given the general lack of accountability across Asia."

Chan is wrong about several things: Americans WILL be hurt as bad as, or worse than, Asians. And it will hardly go unreported.

But the details of this are less important than the visceral content, same as with the Congressional xenophobia over China.

People are looking for other people to blame. Congress will pass "veto-proof" laws to punish the Chinese for being so evil as to lend Americans so much money. Damn those money-lenders!

And the Chinese? They'll be blaming the Americans. "For years, we've sacrificed our standard of living by lending you hundreds of billions of dollars, and shipping you low-cost, high-quality goods. And you pay us back by bankrupting us?"

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

But this is more than sophistry with words. As I've said many times, China and the U.S. are headed for a major genocidal war. A financial crisis will trigger that war because each side will blame the other.

And it's not just a political matter. This blame will not come from the politicians; it will come from the people. The American people are already increasingly suspicious of the Chinese (and other foreigners, including Latinos). As time goes on, during a generational Crisis era, this suspicion turns to anger, to fury and to hatred.

The same will be true in reverse. Chan's article already exhibits a great deal of Asian anger at Americans, and there hasn't even been a real crisis yet. This anger will grow into fury and hatred as well.

As long as everyone's in a manic mood, as long as the music is still playing, as long as everyone's dancing, as long as everyone's making money -- that is, as long as the the stock market bubbles on Wall Street and in Shanghai grow huger and huger -- then everyone's happy. But when disaster strikes, as it will with certainty, people turn ugly. And we can see that happening, day by day by day.

From the point of view of Generational Dynamics, we're headed for a new generational panic and 1930s style Great Depression, with absolute certainly. The date and exact scenario cannot be predicted, but as the mania continues to increase, it can't be too much farther off. (14-Jul-07) Permanent Link
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Wall Street stocks smash records to score new highs

All it took was some news that "wasn't bad," according to Kai Ryssdal on PBS's Marketplace. His guest added that "expectations were that we would get some really bad news today, but instead, we got some OK news."

The AP described it as follows:

"Wall Street soared Thursday, propelling the Standard & Poor's 500 index and Dow Jones industrials to record highs as bright spots among generally sluggish retail sales allowed investors to toss aside concerns about the health of the economy.

The rally, which gave the Dow its biggest one-day percentage gain in nearly four years, was perhaps surprising given that there was no extraordinary announcement or other catalyst often seen with such a huge gain, and that it came before most companies have announced their second-quarter earnings. The rise also marked a sharp contrast to the start of the week, when stocks fell sharply amid concerns that some hedge funds could succumb to ill-placed bets on the housing sector.

But investors, heartened by signs of a happy and spending consumer, clearly decided to put some money on the table. Though retail sales generally appeared to be crimped last month by higher gasoline prices and a tepid housing market, and the outlook for the coming months was difficult to ascertain, the overall reading wasn't as dour as some investors expected. ...

"It's relief that things weren't as bad as people expected," said Bill Schultz, chief investment officer at McQueen, Ball & Associates, referring to the retailers' reports and the economy at large. "We're maybe getting slower growth but not the fall-of-the-cliff economic scenarios," he said of investors' reading of the economy. ...

The Dow shot up 283.86, or 2.09 percent, to 13,861.73; its previous record close, which also came June 4, was 13,676.32. Thursday's jump was the biggest one-day percentage gain for the blue chip index since October 2003 and the biggest one-day point gain since October 2002. The Dow also reached a new trading high of 13,869.94 and had its 50th record close since October.

The Nasdaq composite index rose 49.94, or 1.88 percent, to 2,701.73; the rise Thursday marked the biggest one-day percentage increase since March. The last time the Nasdaq closed at such levels was in February 2001. Still, the index, bloated by the late 1990s tech boom, is nowhere near its closing record of 5,048.62, set in March 2000."

Can you find any reason in the above to justify these records? Neither can I.

Investors are working on pure emotion. It's as if they're scared to death of what's coming soon, and they want to get on the last train out of the station before the earthquake hits.

A web site reader wrote the following to me on Thursday evening:

"Hang in there, John. That tire is just about to explode. I don't care if there was a gain of 283 today. Let's watch. I've told all the people I know to pull their money out, and they treat me like a nut job. Oh well, I can give high interest Mafia loans when the market crashes."

And so, dear reader, and I can only endorse the reader's suggestion. If you're still in the market, you made a big killing today. Don't be greedy, or you'll be sorry. (13-Jul-07) Permanent Link
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Pakistan: Over 106 dead in spectacular assault on radical mosque in Islamabad

Radical students hoped to spark an Islamic revolution against Musharraf.

Map of Islamabad, showing location of Red Mosque and various government buildings. <font face=Arial size=-2>(Source: Der Spiegel)</font>
Map of Islamabad, showing location of Red Mosque and various government buildings. (Source: Der Spiegel)

A spectacular 8-day siege ended on Wednesday after 36 hours of house to house fighting in a mosque complex near President Pervez Musharraf's office in Pakistan's capital city.

Known as Lal Masjid or Red Mosque, it's a large complex of buildings with mosques, madrassas and dormitories for housing hundreds of female students studying there.

It all began last January, starting with by dozens of female seminary students studying and living at the madrassas within the mosque complex.

The female students then demanded that the government impose Taliban-style sharia law and arrest the prostitutes in downtown Islamabad. After a while, the female students would come out in black burqas with long bamboo sticks and threaten the prostitutes. (Talk about gender issues and sexual symbolism!)

In March they kidnapped three women who they claimed were prostitutes, as well as two policemen, but let them go shortly, because they "repented."

By this time, the situation was becoming international news, and it was happening around the same time that Pakistan's lawyers were rioting and demonstrating over the suspension of the country's Chief Justice. The situation drew outside Islamic militants, and undoubtedly some of these young males were attracted by the women there as well.

The last straw came when dozens of students kidnapped nine people, including six Chinese women and a Chinese man, leading to protests from China. The people were released, but Musharraf demanded their surrender.

The situation escalated into a 36-hour siege and gun battle that ended on Wednesday in bloodbath.

It turned out that the Red Mosque had a huge cache of weapons that apparently had been brought there is the last few months.

Most Pakistanis support Musharraf's move, since he apparently had no choice. But questions are being raised about why he let the situation go on for so long, and how he allowed such a huge collection of weapons to be accumlated.

The questioning is more critical because the Red Mosque was practically right down the street from Musharaff's own offices. And how did so many weapons get carried into the Mosque, under the noses of the Intelligence Agency offices?

Violent Islamist cleric Ghazi Abdul Rashid <font face=Arial size=-2>(Source:</font>
Violent Islamist cleric Ghazi Abdul Rashid (Source:

The leading cleric for the Red Mosque was Ghazi Abdul Rashid who called for his own death to spark an Islamic revolution. He said that he would rather be martyred than give in to the government, and he was killed during the siege.

From the point of view of Generational Dynamics, the interesting part of this story is the desire to "spark an Islamic revolution."

The major inspiration for such things nowadays is the Islamic revolution in Iran in 1979. It was sparked by violent student riots, and so it's national for radical Islamists to hope that new student riots will spark a new Islamic resolution.

However, a little arithmetic shows that the probability of a similar reaction at this time in Pakistan is much lower than the probability of that reaction in Iran in 1979.

Iran's previous generational Crisis war was the Constitutional Revolution, that ran from 1905-1909. So, in 1979, 70 years had passed since the end of the last crisis war.

Pakistan's last crisis war was the war with India that ended in 1947, so today only 60 years have passed since Pakistan's last crisis war.

Those 10 years make a big difference, since they mean that there are are still a significant number of people around who survived the last Crisis war, and who therefore will do anything possible to prevent another such war from occurring. These people include parents and relatives of the radical students in the mosque, and they also include Musharraf himself, who was born in 1943, and who has done a remarkable job maintaining peace with India.

That's not to say that a crisis war in Pakistan is impossible today; it's just that it's less probable than it will be in 10 years, and it's less probable than it was for Iran in 1979. Crisis wars are triggered by mass panic, and people who have already survived one crisis war are very unlikely to panic in a way that will cause a new crisis war.

A study of over 100 crisis wars throughout history leads to the following table that shows the chances of a new Crisis war, based on the number of years that have passed since the end of the preceding crisis war:

    # years  of total  Generational Era
    -------  --------  ------------------
      0- 40      0%    Recovery / Awakening eras
     41- 49     11%    First half of Unraveling era
     50- 59     33%    Second half of Unraveling era
     60- 69     25%    First half of Crisis era
     70- 79     16%    Second half of Crisis era
     80- 89      4%    "Fifth turning"
     90- 99      6%
    100-117      5%

As this table shows, Crisis wars have occurred frequently by the 60th year following the end of the previous crisis war (and, in fact, the peak year turns out to be year 58). But most crisis wars wait until after 60 years, so that as many people as possible who survived the previous crisis war are gone.

Right now, it doesn't seem likely that the Red Mosque crisis is going to spark a new crisis war, civil war, or "Islamic revolution."

But it certainly will raise the level of fear and anxiety in the population. Thus, the next time some crisis arises, the level of fear and anxiety may be enough to cause the panic that leads to a new crisis war. Based on Pakistan's history, however, the new crisis war is not likely to be an "Islamic revolution"; it's much more likely that it will be a civil war between different Muslim ethnic groups in Pakistan, leading to a war with India.

If Musharraf disappears, for whatever reason, then he will be replaced by someone from a younger generation who will be much more militant towards India, and the probability of a new crisis war will increase substantially.

Generational Dynamics predicts there will indeed be a new genocidal crisis war between India and Pakistan, and since both countries possess nuclear weapons, there's little doubt that they will be used. It's impossible to predict when such a war would begin, but if Musharraf disappears and is replaced by someone from a younger generation, things will certainly start moving along. (12-Jul-07) Permanent Link
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Moody's joins S&P in downgrading mortgage-based securities

Stocks fell sharply in Europe, North America and Asia, following the moves on Tuesday morning by ratings agencies Standard & Poor's and Moody's Investors Service to downgrade the ratings of mortgage-based securities based on CDOs (credit derivatives). Mutual funds, investment trusts, hedge funds, savings banks, pension funds, college endowments, money market funds, insurance companies, and so forth, hold nominally tens or hundreds of trillions of dollars of these securities in their portfolios, and a fall in the values of credit derivatives will have a domino effect that causing huge losses in these portfolios.

Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 10, 2007 <font face=Arial size=-2>(Source:</font>
Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 10, 2007 (Source:

The ABX-HE-BBB- 07-1 securities index, which is a proxy for the values of the lowest quality of these CDOs, fell from 55 to 49 early in the day, just after S&P made its announcement, but recovered slightly to close just above 51, resulting in a net fall of 7.4%.

Even more startling, though, is that the ABX-HE-AAA 07-1 index, which is a proxy for the HIGHEST quality of these CDOs fell even more sharply -- from about 99.5 to 98.2. (The "value" of a security based on this index is computed from the (100 - the value of the index), and so a fall from 99.5 to 98.2 is a fall by a factor of 2.6.)

This means that the the mortgage crisis is now spreading rapidly from low-quality subprime mortgages to the highest quality mortgage-based securities.

After S&P announced its lowering of the ratings, Moody's followed suit.

Here are some excerpts from the actual S&P report (PDF):

"The CreditWatch actions are being taken at this time because of poor collateral performance, our expectation of increasing losses on the underlying collateral pools, the consequent reduction of credit support, and changes that will be implemented with respect to the methodology for rating new transactions. Many of the classes issued in late 2005 and much of 2006 now have sufficient seasoning to evidence delinquency, default, and loss trend lines that are indicative of weak future credit performance. The levels of loss continue to exceed historical precedents and our initial expectations.

We are also conducting a review of CDO ratings where the underlying portfolio contains any of the affected securities subject to these rating actions. ...

We have been surveilling these transactions on a regular basis and have been monitoring market trends. At this time, we do not foresee the poor performance abating. Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions.

[[Note the phrase, "misrepresentations in the mortgage market." - JX]]

New data reveals that delinquencies and foreclosures continue to accumulate at an increasing rate for the 2006 vintage. We see poor performance of loans, early payment defaults, and increasing levels of delinquencies and losses. ...

On a macroeconomic level, we expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress. Weakness in the property markets continues to exacerbate losses, with little prospect for improvement in the near term. Furthermore, we expect losses will continue to increase, as borrowers experience rising loan payments due to the resetting terms of their adjustable-rate loans and principal amortization that occurs after the interest-only period ends for both adjustable-rate and fixed-rate loans. ...

Although property values have decreased slightly, additional declines are expected. David Wyss, Standard & Poor's chief economist, projects that property values will decline 8% on average between 2006 and 2008, and will bottom out in the first quarter of 2008. ...

[[Catch the note of optimism in the last sentence. - JX]]

The Mortgage Asset Research Institute (MARI) reports that alleged misrepresentations on credit reports were up significantly as a percentage of total submissions received in 2006. MARI, which was recently commissioned by the Mortgage Bankers Assoc. (MBA) to conduct a mortgage fraud study, reported that the current findings of fraud were in excess of previous industry highs. Data quality concerning some of the borrower and loan characteristics provided during the rating process has also come under question. ...

Data quality is fundamental to our rating analysis. The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics."

S&P's statement does several things that it has to do:

Stocks fell about 1% in Europe, North America and Asia, following the release of the ratings changes. Tuesday's speech by Fed Chairman Ben Bernanke had no apparent effect on the stock market except to cause them to go lower.

As I've been saying now for five years, from the point of view of Generational Dynamics we're headed for a new 1930s style Great Depression. (11-Jul-07) Permanent Link
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Fed Chairman Ben Bernanke delivers incredibly bizarre speech on inflation

While the rest of the financial world is trying to deal with the subprime mortgage meltdown, Bernanke, who replaced Alan Greenspan as Chairman of the Federal Reserve central bank early in 2006, talked as if the only thing in the world that mattered was whether the rate of inflation was 3% or 4%. Talk about fiddling while Rome burns!

Here's what he's worried about: Do the American people have the proper expectation of the inflation rate? He uses the term "anchored" to mean that people's expectations match reality; thus, if inflation goes up a little and people expect it to continue to go up a little, then inflation expectations are "perfectly anchored"; but if inflation goes up a little and people expect it to go up a lot, then expectations are "poorly anchored."

Can you believe this? Let's go on.

Here are extracts from Bernanke's speech on Tuesday:

"Why do we care about the variability of inflation expectations? ... [Because] the extent to which inflation expectations are anchored has first-order implications for the performance of inflation and of the economy more generally.... [A] lower sensitivity of long-run inflation to supply shocks would imply that such shocks are much less likely to generate economic instability today than they would have been several decades ago. Notably, the sharp increases in energy prices over the past few years have not led either to persistent inflation or to a recession, in contrast (for example) to the U.S. experience of the 1970s. ...

Fed Chairman Ben Bernanke on February 28 <font face=Arial size=-2>(Source: CNN)</font>
Fed Chairman Ben Bernanke on February 28 (Source: CNN)

Similar logic explains the finding that inflation is less responsive than it used to be to changes in oil prices and other supply shocks. Certainly, increases in energy prices affect overall inflation in the short run because energy products such as gasoline are part of the consumer's basket and because energy costs loom large in the production of some goods and services. However, a one-off change in energy prices can translate into persistent inflation only if it leads to higher expected inflation and a consequent "wage-price spiral." With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices. A related implication is that, if inflation expectations are well anchored, changes in energy (and food) prices should have relatively little influence on "core" inflation, that is, inflation excluding the prices of food and energy.

Although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored. ...

[Research finds that, not counting shocks, the variability of inflation] appears to have fallen significantly after about 1983. That is, unexpected changes in inflation are today much more likely to be transitory than they were before the early 1980s. Because it seems quite unlikely that changes in inflation could persist indefinitely unless long-run expectations of inflation also changed, I interpret [this] finding as consistent with the view that inflation expectations have become much more anchored since the early 1980s."

The gist of his speech is that inflation is more stable since the early 1980s, and therefore the public's expectations of inflation are more stable, so the public's expectations are "much more anchored." Therefore, things like energy price shocks don't have long-lasting effects.

Dear reader, this speech is total, utter, absolute drivel. Bernanke has NO IDEA where inflation expectations help or hurt the economy, or have any effect on the economy at all. He presents some research on what happened in the 1990s, but that research didn't apply before the 1990s, and he has NO IDEA whether it applies today. Total absolute drivel.

Ben Bernanke at Princeton
Ben Bernanke at Princeton

You know, I used to comment on Alan Greenspan's speeches all the time. He said things I agreed with and things I disagreed with, but what he said always was interesting and insightful and intelligent. Greenspan was born in 1926, lived through the horrors of the Great Depression and World War II, and knows a lot about how the world works.

Bernanke was born in 1953, and knows little of how the world works. I rarely comment on Bernanke's speech because he comes across to me as an airhead. He may have been a Princeton professor of Economics, but that obviously doesn't qualify him to actually know anything.

Let's recall a couple of things that Bernanke has said in the past, as I explained in my 2005 essay, "Ben S. Bernanke: The man without agony," Bernanke doesn't believe in bubbles. He thinks that the Great Depression could have been avoided by a few Fed policy changes (mostly having to do with inflation, incidentally, which probably explains why he talks about it so much today).

When speaking about America's astronomical and exponential growing debt to other countries in March, 2005, Bernanke blamed America's debt on "global savings glut" in other countries.

As dumb as that was, it wasn't the dumbest thing that Bernanke has said. I think that the dumbest thing is his belief, as laid out in a speech he made on October 7, 2004, that the Fed strongly influences the stock and bond markets merely by publishing the Open Market Committee minutes earlier and more often. He doesn't believe that fundamentals have anything to do with the economy; all that matters is what the Fed SAYS, and that's important because it affects what investors think. Bernanke believes that what matters is what people expect.

That's why he gave this moronic speech on Tuesday. In his tortured mind, the state of the economy depends on the public's expectations of what inflation will be.

And the stock market? He doesn't believe in bubbles. He doesn't believe that price/earnings ratios matter. All that matters is what people expect, and that depends on what the Fed says.

As I explained at length in my comprehensive analysis of macroeconomic theory that I wrote last year, "System Dynamics and the Failure of Macroeconomics Theory," economists have been wrong about everything, at least since the start of the bubble in 1995. They didn't explain or predict the bubble or its timing. They failed to predict low inflation or high unemployment in the early 2000s. They didn't predict or explain productivity increases. They didn't predict or explain the low interest rate "conundrum." They didn't predict or explain the housing bubble. They've been consistently wrong about almost everything.

During the 1930s, huge numbers of businesses were wiped out and forced into bankruptcy. The businesses that survived only did so by completely renewing themselves, essentially making themselves new businesses.

The reason that inflation was so unstable in the 1970s is because all those businesses reached their peak in the 1960s and 1970s, producing top-notch products that everyone wanted. The demand for these products pushed prices up, leading to high inflation.

The reason that inflation is so stable now is because all those 1930s businesses are now encrusted in bureaucracy, and are no longer producing products that people want. This has caused tens of thousands of factories to shut down, as jobs fled to China; even service businesses ended, as service jobs fled to India. The low demand for American-made products has forced inflation to near-zero, despite oil price shocks.

The reason that the dot-com bubble occurred in the 1990s was because it occurred at precisely the time that all the risk-averse financial managers who had grown up during the Great Depression disappeared (retired or died), all at once, and were replaced by airhead Baby Boomers who abused credit in a debauched fashion. This has led to the situation we see today, where the housing bubble is having a domino effect that will cause tens of millions of people to lose their life savings.

But all this appears to be lost on Bernanke, who's worried about what the American public expects about inflation. It's like a cartoon.

I don't know what to make of Bernanke. Can he really be as dumb as he seems? He's said stupid things in the past, but surely he can't be so oblivious to what's coming.

As I wrote the other day, it's now evident that there are many high-level financial managers who know that we're headed for a massive financial crisis, but are afraid to say so because they're afraid of triggering it.

Maybe I've underestimated Bernanke; maybe he really knows what's going on, but just doesn't want to say anything. After all, one word from him would indeed be all the trigger that's needed. (11-Jul-07) Permanent Link
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ABX index collapses on Tuesday after S&P downgrades mortgage-based securities

This is a multiple-alarm warning.

Let's quickly review where we stand:

Two weeks ago I wrote that ratings agencies were being accused of purposely covering up, by failing to lower their ratings on CDOs (mortgage-based credit derivatives) on a timely basis. The accused ratings agencies were Standard & Poor's, Moody's Investors Service and Fitch Ratings.

Two days ago, I I listed three current imbalances that are reaching a state so severe that a collapse is possible at any time. Two of the three require investor panic, but one of the -- the revaluation of overpriced CDOs -- is in progress and cannot be stopped.

This morning (Tuesday), Standard & Poors said it will downgrade 612 residential securities backed by subprime mortgage loans.

This immediately triggered a collapse in the ABX-HE-BBB- 07-1 index this morning of over 6 points, to 49 from 55.5.

According to Reuters, a downgrade of that size and magnitude would trigger severe losses as investors who are prevented from holding anything other than investment grade issues would unload their holdings en masse.

To put it another way: Mutual funds, investment trusts, hedge funds, savings banks, pension funds, college endowments, money market funds, insurance companies, and so forth, hold nominally tens or hundreds of trillions of dollars of these securities in their portfolios are going to have to re-evaluate their holdings sharply downward, according to mark-to-market accounting rules. This is real money we're talking about, folks. If your life savings are in one of these vehicles, or if you expect your pension fund to support you, you should be aware that things are changing quickly.

I'll follow up on this subject soon, but I'm posting this right away as it's an extremely alarming situation. (10-Jul-07) Permanent Link
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Pope approves return to traditional Catholic masses in Latin

Expressing surprise that even young generations found the Latin mass "suited to them,"

Pope Benedict has granted permission for Bishops to approve use of the traditional Latin mass when requested by parishoners.

Pope Benedict
Pope Benedict

The Latin mass was pretty much abolished in 1962 by the Second Vatican Council, which had the mass given in the parish's local language, rather than Latin.

According to the text of the Pope's letter:

"Afterwards, however, it soon became apparent that a good number of people remained strongly attached to this usage of the Roman Rite, which had been familiar to them from childhood. This was especially the case in countries where the liturgical movement had provided many people with a notable liturgical formation and a deep, personal familiarity with the earlier Form of the liturgical celebration. ...

Many people who clearly accepted the binding character of the Second Vatican Council, and were faithful to the Pope and the Bishops, nonetheless also desired to recover the form of the sacred liturgy that was dear to them. This occurred above all because in many places celebrations were not faithful to the prescriptions of the new Missal, but the latter actually was understood as authorizing or even requiring creativity, which frequently led to deformations of the liturgy which were hard to bear. I am speaking from experience, since I too lived through that period with all its hopes and its confusion. And I have seen how arbitrary deformations of the liturgy caused deep pain to individuals totally rooted in the faith of the Church. ...

Immediately after the Second Vatican Council it was presumed that requests for the use of the 1962 Missal would be limited to the older generation which had grown up with it, but in the meantime it has clearly been demonstrated that young persons too have discovered this liturgical form, felt its attraction and found in it a form of encounter with the Mystery of the Most Holy Eucharist, particularly suited to them. Thus the need has arisen for a clearer juridical regulation which had not been foreseen at the time of the 1988 Motu Proprio. The present Norms are also meant to free Bishops from constantly having to evaluate anew how they are to respond to various situations."

From the point of view of Generational Dynamics, what's most interesting about this letter is the last paragraph: That even young people, with no experience with the Latin mass, are demanding it.

As the world enters a new generational Crisis era, 62 years after the end of World War II, there is a return to traditional norms around the world, including traditional gender roles and traditional religious beliefs. Thus, we've seen the Russian Orthodox Church reunite 80 years after Bolshevik Revolution, and we've also seen a conflict in Turkey between strict followers of Islam and secularists.

A lot of people are unhappy with Pope Benedict's decision. Within the Catholic Church itself, there's a "culture war" between traditionalist and modernists.

This is not a simple matter. In an article on religion last month, I described how some really trivial changes in the rites of the Russian Orthodox Church in 1652 created a major rift in the Church, including a new branch called the "Old Believers" that exists to this very day. I'm sure that Pope Benedict, who has enormous respect for the lessons of history, is quite aware of the lessons of the Old Believers.

Another issue is that Jewish groups are expressing anger at the change.

That's because the traditional liturgy prayed for the conversion of the "perfidious Jews" in Good Friday prayers marking the death of Jesus Christ to be Catholics.

The revised liturgy, used after 1970, replaced this with a prayer recognizing the Jews’ eternal covenant with God, which is considered less offensive.

You know, I've always found this whole debate a constant source of puzzlement. There's really no doubt what Christian theology says: Unless you accept Jesus Christ as your savior and the son of God, you're going to hell. There's no two ways about it, and it doesn't matter whether you're an atheist, an agnostic, a Jew, a Muslim or a Hindu. Returning to a liturgy that calls for the conversion of Jews to the Catholic religion is just saying what's already an ironclad belief.

Of course, there is that use of the word "perfidious," which refers to the blame going to the Jews for the death of Jesus Christ. Perhaps Benedict might agree to take that word out.

At any rate, this is going to be a heavily debated change, and it will be interesting to see what groups and populations support it, and which oppose it. (9-Jul-07) Permanent Link
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As global economy continues to deteriorate, most people are oblivious

There is increasing evidence that major financial organizations are purposely covering up the dangers to the global economy posed by the subprime mortgage collapse and China's stock market bubble.

The most startling example goes back to the Bear Stearns debacle of last month. As I described it at the time it happened, Bear was forced ("extorted") into pouring good money after bad bailing out a hedge fund that it did not have to bail out. It did so to "prevent a broad market meltdown," having to do with forced resale of the hedge funds' CDO assets. Such a forced resale would create a market for CDOs, forcing EVERY bank and EVERY financial institution to re-evaluate their holdings, based on mark-to-market rules.

At the time I wrote this, this possibility was just beginning to be understood. However, numerous articles are now exposing this as a massive cover-up. I quoted several when I wrote, a couple of weeks ago, that the market for credit derivatives may be collapsing.

We now have a situation that's unique in modern times.

Imagine that you were one of the negotiators working for Bear Stearns or JP Morgan or Merrill Lynch during those 18-hour days last month when the negotiations to bail out the hedge fund was being debated. They must have realized that, without a bailout, the forced mark-to-market repricing would cause a domino effect of bankruptcies.

Thus, they may have realized that they were holding in their hands the power to force multiple bankruptcies and, at least potentially, create a historic stock market crash.

Avoiding blame

Now, of course, there are many tin-foil hat paranoics who claim that there are always people with this power. People like John D. Rockefeller and Henry Kissinger were thought to control to control the world's economy through control of oil, and that same paranoia extends today to Halliburton.

But it's an important holding of Generational Dynamics that such major events are caused by the attitudes and behaviors of large masses, entire generations of people, not the actions of a small group of individuals.

But a more precise statement is that it's generational flow that creates the necessary conditions so that even a small spark can trigger a conflagration -- a major crisis war or a generational panic. And in certain situations, it's possible for an individual to be in a position to provide that spark.

This is not a situation that was possible ten years ago, two years ago, or even one year ago. One year ago, if I had been asked, I would have said that it's impossible for anyone to provide a spark that would have the predictable effect of causing a stock market panic and crash.

And that seems to be the situation today. The situation with the mark-to-market rules is so irrestible that I can't see how a disastrous domino effect would have been avoided. So we can't be certain, of course, but it appears that the Bear Stearns negotiators had that power in their hands. At the very least, they must have perceived themselves as having that power.

Thus, I said that this situation is unique in modern times, but it's not unique in historical times. It was also true in the lead-up to the 1929 stock market crash.

Here's how it's described in the book The Great Crash - 1929, by John Kenneth Galbraith:

"Purely in retrospect it is easy to see how 1929 was destined to be a year to remember. ... [It] was simply that a roaring boom was in progress in the stock market and, like all booms, it had to end. On the first of January of 1929, as a simple matter of probability, it was most likely that the boom would end before the year was out, with a diminishing chance that it would end in any given year thereafter.

[[This is similar to an argument that I make frequently on this web site -- that a war or a panic is overdue, that it could happen next week, next month, next year, or thereafter. The point is that the probability of it happening later is increasingly small. - JX]]

When prices stopped rising -- when the supply of people who were buying for an increase was exhausted -- then ownership on margin would become meaningless and everyone would want to sell. The market wouldn't level out; it would fall precipitately.

All this being so, the position of the people who had at least nominal responsibility for what was going on was a complex one. One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of personal disaster which awaited them when the boom came to an end. But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. (for nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-21.) The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, months of life. One may doubt if at any time in early 1929 the problem was ever framed in terms of quite such stark alternatives. But however disguised or evaded, these were the choices which haunted every serious conference on what to do about the market." (pp. 24-25)

So this is what's happening right now. There are people who are very well aware that a crash is coming, but they're afraid of being blamed for triggering the crash.

Their fear mainly stems from the fact that they're well known public figures. They may have to keep their expectations to themselves, for fear of causing a panic.

Amazingly, this is also true of financial bloggers. There are many financial blogs online these days, and many bloggers that talk about these major imbalances in the global economy. But no one seems to want to spell out what's coming in terms of a new 1930s Great Depression. They certainly must know better, since they're constantly posting dramatically awful financial information, but they never state any conclusions.

In one case, I posted a comment asking the blogger specifically for what he sees coming. His answer? Something like the Panic of 1893. I don't know if this is a joke or what, but the Panic of 1893 was equivalent to a fairly typical post-WW II recession.

These financial bloggers are also Very Important People. Some are high level financial managers, some are college professors. They're such important people that they're probably afraid that if they draw the correct conclusions then they too might be blamed for triggering a crash.

I, on the other hand, have an enormous advantage over all of these people, because I'm a total nobody. There are roughly several thousand regular readers of this web site, and probably less than half of them even believe all they read. So there's no chance at all that I'd be responsible for triggering anything.

For any official who is an actual somebody, and is in a position to take some action, there comes the dilemma of what to do, what action to take to end the craziness: "The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action," as Galbraith points out.

So this must have been a consideration for the Bear Stearns negotiators. They must have realized, as the officials did in 1929, that taking the "right" course would lead to an immediate disaster, and taking the "wrong" course, which they did, would lead to a later disaster. And besides, they could use the extra time themselves to protect their own assets, at the expense of others.

Let's now look at the major, most visible imbalances in today's global economy.

#1: Subprime mortgage based derivatives (CDOs)

There are many major imbalances in today's global economy. America's increasing balance of payments deficit is very visible, but it's not the kind of imbalance that's likely to trigger a major panic. But we'll identify three imbalances that are so near a critical stage, that a panic in the near future cannot be avoided.

The first is the the collapsing market for credit derivatives. Of the three imbalances that we're describing, the other two are large and growing bubbles that must eventually burst at some time in the future. There is no compulsion that those bubbles must burst immediately.

But the CDO imbalance appears to be a like a growing crack in a huge, monster dam. You can see the crack growing, but the dam is too big to hope to repair the crack. And you can see distant storm clouds meaning that there'll be even more floods of water pushing against the same, enlarging the crack. You know with certainty that the crack will keep growing and the dam will burst before too much longer.

Another way of saying this is as follows: The real estate bubble is already leaking. Increasingly many mortgages are defaulting, and increasingly many banks are foreclosing. That's the growing crack in the dam, and the storm clouds are the vast numbers of subprime "no documentation" adjustable rate mortgage (ARM) loans written in the last two years. It's known that many of these ARMs will "reset" to much higher interest rates this year, forcing more defaults and disclosures, so the widening crack in the dam cannot be stopped.

The Implode-o-Meter web site lists 96 lenders, as of today, that have "imploded" this year, thanks to the continuing collapse of the subprime mortgage market.

Just to take one example, Brookstreet Securities Corp. of Irvine, Calif., a lender that has hundreds of offices nationwide, closed its offices last month because it was unable to meet margin calls for its leverage assets. Brookstreet was a security dealer dealer with over 3,600 clients, who had invested a total of $571 million in the company's hedge funds. The hedge funds had invested in mortgage-based credit derivatives, purchased at full price on margin. Last month, Brookstreet was forced to re-evaluation their holdings based on mark-to-market rules. The credit derivatives are now worth far less than their original value, and thousands of clients, ordinary people, will lose their life savings.

That's just one example of one company. There are more examples every week or two.

And that's not all. The CDOs (credit derivatives) based on these defaulting mortgage loans are falling in value. There are nominally hundreds of billions of dollars of these CDOs being held by hedge funds today, and those hedge funds are being held by savings banks, pension funds, college endowments, mutual funds, insurance companies, etc., meaning that millions of ordinary Americans are going to be hurt.

Real estate bubbles and collapses seem to be a part of every generational financial panic and crisis, and that was certainly true of the Great Depression of the 1930s.

But it was also true of the previous generational global financial crisis, the the Panic of 1857. I've previously described how the real estate bubble was formed by quoting from a 1950 book by Allan Nevins, The Emergence of Lincoln: Prologue to Civil War 1859-1861, Volume II. Now let's take a look at Nevins' description of how the bubble unraveled:

"[When] the panic was over, the inevitable aftermath of depression had to be faced. It closed down over the country like a chill mist, filling the next two years with slowly diminishing misery and discontent. A painful readjustment in values had to take place. The price of land, for example, sank to a level bearing a far closer relation to tillage returns. Not merely speculators, but farmers who had mortgaged themselves to buy excessive tracts, paid a sad penalty. As late as 1860, Greeley wrote from Prairie du Chien: "The West is poor. The collapse of the railroad bubble ... has spread desolation over the land." Consumers' goods were a drug on the market. Europeans, estimating that they had lost hundreds of millions of dollars in worthless securities bought during the previous five years, were in a morose mood, and it gave them little comfort to think that Americans had lost more.

[President] Buchanan wrote an inadequate analysis of the panic into his message of 1857, dwelling upon the stale theme of vicious systems of paper currency and bank credits. He said nothing about extravagant railroad construction, reckless speculation in land and commodities, or swollen imports. The London Economist characterized it as "a cloud of dust to cover a disgraceful retreat -- a great scapegoat for the rash and impudent speculations -- and in some cases, we regret to say, for the impudent frauds practised upon the too-gullible and too-avaricious people of the Old World." No action was expected of the general government in dealing with the depresion, and except for certain palliative measures by the Treasury, nothing in particular was done. (pp. 193-94)"

As I said, the situation with subprime mortgages and CDOs no longer seems to require a panic. Holders of assets with credit derivatives are increasingly being forced to mark their assets to market, and the repricing is now in the works and cannot be legally stopped. No panic is required. This is a structural imbalance that is now inevitable in the near future.

#2: Shanghai Stock Market Bubble

The second imbalance nearing a critical stage is the Shanghai Stock Market, which has been in bubble territory for almost a year.

Recall that a sharp fall in the Shanghai stock market triggered a momentary panic on Wall Street in February.

The Shanghai stock market is extremely volatile, and is showing the signs of volatility that precede a panic and crash. Here are the values of the composite index for the last three weeks:

    Date      Index       Change
    -----     -------     -------
    6/18      4253.34     + 2.92%
    6/19      4269.52     + 0.38%
    6/20      4181.32     - 2.07%
    6/21      4230.82     + 1.18%
    6/22      4091.44     - 3.29%
    6/25      3941.08     - 3.68%
    6/26      3973.37     + 0.82%
    6/27      4078.59     + 2.65%
    6/28      3914.20     - 4.03%
    6/29      3820.70     - 2.39%
    7/02      3836.29     + 0.41%
    7/03      3899.72     + 1.65%
    7/04      3816.16     - 2.14%
    7/05      3615.87     - 5.25%
    7/06      3580.50     + 4.58%

An online correspondent has informed me that the Shanghai stock market is exhibiting "a possible crash pattern as follows:"

"From the high, there was a drop of about 20%, then a rally back up to test the high (but not exceed it). From the retest, there was another drop and the end of that drop shows one daily close below the close of the previous drop. From there, the market has rallied for one day. This is the exact pattern that was made in 1929 before our market crashed. The Hang Seng (Hong Kong Index) made a similar pattern before it crashed in 1997. If the SSE follows these patterns it will crash next week, and the crash will be H-U-G-E."

Now, I personally am not into this kind of short-term forecasting, nor would I be anywhere near so certain that there'll be a crash next week, although my online correspondent may wish to brag about it if it happens.

But there's no doubt that this bubble must crash soon -- next week, next month, next year, as I always say.

And when it does crash, there's no doubt that it will have major percussions within all of China.

Will this affect the United States? Remember that the economies of China and America are very closely tied together these days, as you read the following account from Nevins' book of what happened in the Panic of 1857:

"British and American interest were so closely connected that a blow to one struck the other with almost equal weight. More than a fifth of the British exports in 1856 had gone to the United States, while more than a third of the foreign government securities ordinarily listed on the British exchanges were American. When business with America was half-paralyzed, American stocks and bonds dropped to abysmal levels, and New York paper becamse unsaleable, then British merchants, bankers were hard hit; In October and November a dismal success of failures was chronicled by the British press. Scottish banks were smitten as by a plague. One London brokerage house failed for five million pounds. In France the Crédit Mobilier bubble was priced. French failures in the autumn of 1857 were even more numerous and calamitous than British. Norway, Sweden, and all the Baltic ports suffered heavily. Hamburg, one of the principal trading links between North Europe and America, was brought to her knees. A far east as Poland and Austria, the battering impact of the panic was felt.

As Disraeli said, the business mismangement of half Europe was suddenly exposed. "All the bubbles, blunders, and dishonesties of five years' European exuberance and experiments in credit were tested or revealed." (pp. 190-91)

This is the kind of massive financial destruction that can be expected to occur in the United States and world wide, when the inevitable crash of the Shanghai stock market occurs.

#3: New York stock markets

I've written about the New York stock markets many times. I've been pointing out for years that a stock market crash is mathematically certain, given that the market is overpriced by a factor of more than 250%, just like 1929.

Earnings growth, 2003-present. <font face=Arial size=-2>(Source: WSJ)</font>
Earnings growth, 2003-present. (Source: WSJ)

The Dow has maintained astronomically high levels of price/earnings ratios because of astronomically high levels of earnings growth since the year 2000, as the graph shows. In fact, double-digit earnings growth began in 1995, and has continued to this year.

Basically, investors were betting that double-digit earnings growth rates would continue for all time, and that justified the high levels of price/earnings ratios.

But as I explained in my 2005 article, long-term average earnings growth rates are 11%. After 13 years of growth rates averaging 18%, the law of "Mean Reversion" dictates that earnings growth must be considerably lower than 11%, in order to restore the long-term average of 11%. This might mean, for example, that earnings growth will be at 4% for 13 years; or it might mean 4-5 years of earnings reductions, then a faster return to 11% annual growth. But in the end, it will have to average 11%.

Some people pooh-pooh these claims, thinking that the law of Mean Reversion can't possible be an immutable law of nature. And yet it is, as immutable as the law of gravity. There is no possibility avoiding this earnings result.

When I wrote my 2005 article, I thought that average earnings growth would start falling shortly after that, ot they didn't. But now, in 2007, it has, and the graph shows that it's apparently falling rapidly.

This undercuts the entire rationale that investors have followed for overpricing the stock market. When this fact sinks in -- and it could happen tomorrow, next week or next year -- investors will panic and start to sell.

The Law of Mean Reversion also applies to the Price/Earnings ratio index, which has also been well above average since 1995. It too will to fall sharply from its current value of around 18 to a much lower level. It's been well-below 10 six times in the last century, most recently in 1982, and my expectation is that it will fall at least that far again. Stock prices will fall to the Dow 3000-4000 level or lower.


The three global imbalances that I've listed -- credit derivative collapse, Shanghai stock market bubble, and Wall Street bubble -- are now at the point of "high alert," for the reasons that I've given.

As I've done several times in the past, I must once again strongly recommend to all my readers that they pull out of the stock market, and also out of (and associated investments, including mutual funds, money funds, investment trusts, hedge funds, and so forth). Keep in mind that I'm not alone in this recommendation -- Morgan Stanley in Europe delivered a "Full House" sell signal on stocks just last month.

After a financial panic occurs, cash will be king. You should plan on keeping cash in your bank account. If you insist on investing in something, I recommend short-term (6 or 12 month) Treasury bonds. You can purchase these online, for no commission, at . I don't think long-term (5 or 10 or 30 year) Treasury bonds are a good idea, because there are hundreds of billions of dollars worth of them languishing in central banks around the world, especially China and Japan, and in case of an international financial crisis, these would all be dumped on the market, making them nearly worthless. Stick with short-term bonds.

This web site has been up since 2002, and has been making serious predictions since 2003. Many of these predictions have been counter-intuitive, and have been completely opposed to the "general wisdom" and the statements of pundits, journalists and politicians. And yet, every Generational Dynamics prediction has either come true or is trending true; none have turned out to be wrong.

We're now entering another time of extreme danger, and it's important that you be prepared. I'll repeat the message that I've posted many times before: No one can stop what's coming, any more than anyone can stop a tsunami. You can't stop what's coming, but you can prepare for it. Treasure the time you have left, and use the time to prepare yourself, your family, your community and your nation. (8-Jul-07) Permanent Link
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Britain's terrorist doctor crisis may be increasing American xenophobia

I just listened to famous political pundit Dick Morris explain the solution to the problem of the terrorist doctors in Britain's National Health Service (NHS).

Dick Morris, speaking on the O'Reilly Factor. <font face=Arial size=-2>(Source: Fox)</font>
Dick Morris, speaking on the O'Reilly Factor. (Source: Fox)

Ten years ago, the glib, likable Dick Morris used to be an extremely Machiavellian advisor to President Bill Clinton, and managed Clinton's 1996 re-election campaign, until he was forced to resign after a sex scandal. Since then he's turned against both Bill and Hillary Clinton, but doesn't particularly like President Bush either.

It was a month ago when the comprehensive immigration Bill collapsed in Congress, because Boomers are incapable of governing. I thought that the bill was dead for sure, but then a couple of weeks ago it was revived, thanks mainly to the arm-twisting by Democratic Senator Ted Kennedy (Mass.), working in conjunction with President Bush.

Kennedy, born in 1932, is from the Silent Generation, and understands the importance of compromise. To arrogant, narcissistic Boomers, born after WW II, the idea of giving up something to reach a compromise is a foreign concept. But Silents, like Kennedy, who lived through the utter daily horror of WW II, understand how important it is to compromise to get something done.

For a while, I actually thought that the revived Immigration bill would pass in the Senate, and passage seemed almost certain up till the final day. But there was a barrage of opposition on both sides. The "anti-immigration" side didn't like the fact that there was a pathway to citizenship. The "pro-immigration" side didn't like the onerous roadblocks put in the way of getting citizenship.

By the end, radical Boomers and Gen-Xers on both sides of the issue were able to tear the bill apart, and the Silents lost out.

Dick Morris is strongly "anti-immigration." (He would say, strongly "anti illegal immigration.")

When he spoke this evening, he expressed the virulent xenophobia that's increasing these days throughout the world.

The guest host was the incredibly hot and sexy Michelle Malkin, a conservative pundit who is at her absolute cutest when she's having a cat fight with another female pundit whom she disagrees with. Tonight, however, she was talking to Morris, and agreeing with him completely.

Here's the exchange:

"Dick Morris: [I recommend] that we ought to ban all immigration, all tourism, all business travel from countries that are listed by the State Department as "harboring terrorists" or "sponsoring terrorism." If that were the policy in the United States or in the UK, those doctors could never have gotten in. And they chose doctors because they figured that would be easy to get them into the country. And that was the reason that al-Qaeda recruited the doctors, apparently. So what happens is that they're playing our immigration laws. And if we banned immigration from these countries, we would be much safer against terrorism. ... I really hope that people get behind [that recommendation], because that is what is necessary to stop these attacks.

The hot, sexy Michelle Malkin, serving as substitute host. <font face=Arial size=-2>(Source: Fox)</font>
The hot, sexy Michelle Malkin, serving as substitute host. (Source: Fox)

Michelle Malkin: I certainly agree with you. Unfortunately, you've got bi-partisan support for basically doing nothing, when it comes down to cracking down on these people.

Dick Morris: And the reason is tuition. 12% of the revenues of the colleges and the universities in the US come from foreign students.

Michelle Malkin: And yes, we've got President Bush who has basically opened up our colleges and universities to aviation students from where? Saudi Arabia! That's right!

Dick Morris: (Laughing) But he makes taking off and landing a required course.

Michelle Malkin: (Also laughing) Well OK, then, I guess we're better off than before."

It's worthwhile tearing this conversation apart, since it's complete drivel. It's value is to show the intensity of the xenophobia exhibited by many people.

First off, the UK isn't in a position to ban wholesale any large group of foreign doctors. The UK has a doctor shortage, and 40% of its doctors nationwide are foreign-trained. Britain could not do without those doctors.

Second, Dick Morris wants us essentially to ban all kinds of contact with people listed as "harboring terrorists" by the State Dept. I'm not sure where that list is, or if it even exists, but let's focus on the countries that the terror suspects are from: Jordan, Saudi Arabia, India, other Mideast countries. Can you imagine banning tourism and business travel from all of these countries?

And what about the UK? They're harboring terrorist doctors! Should we ban Brits from coming to the US?

I've been very critical of politicians in general, because of their sheer stupidity and ignorance. This was shown by articles in the Congressional Quarterly. Washington journalists, analysts and politicians have no idea what's going on in Iraq. They don't know the differences between Sunni and Shi'ite, they don't know that al-Qaeda is operating in Iraq, and they don't know that al-Qaeda is a Sunni organization. So Biden is just one of the mob in that regard.

But now we see that Dick Morris is proposing banning all people from these countries. When he referred to countries listed by the State Dept., he must have been thinking of countries like Upper Slobovistan and Lower Slobovistan, countries where almost all the people in them are radical Islamists, and they rarely come to the UK or US anyway. He probably thinks that by banning the Slobistanians, we can make ourselves safe.

But when it comes to REAL countries, all of the countries from which the doctors came are our allies. Saudi Arabia, Jordan and India are some of our staunchest allies in Asia. Are we really going to ban all of them?

Morris says, "They're playing our immigration laws," and his solution is to shut down all immigration, and especially keep them out of our colleges. Yes, that would be a winning strategy.

Now let's turn to Malkin's remarks.

First, she said, "you've got bi-partisan support for basically doing nothing, when it comes down to cracking down on these people." This is an interesting remark, because the "bi-partisan support" is being supplied by the people in the Boomer generation and Generation-X, people who are incapable of governing. Referring to bi-partisan support for government paralysis is a clever way of stating it (though perhaps she meant something sharper).

But then she made those cute facial expressions and used that pretty little mouth of hers to say that "President Bush basically opened up our colleges and universities to aviation students from where? Saudi Arabia! That's right!"

There's an allusion here to the fact that almost all of the 9/11 hijackers had taken aviation courses, where they learned how to fly the planes, but didn't bother to learn how to takeoff and land. That explains Morris's retort about requiring them to learn takeoffs and landings.

There's absolutely no way that hijackers could succeed today the way they did on 9/11. Recall that they used box cutters as their only weapons, took over from the pilots, and cut off communications with the towers. None of that could happen today. The door to the pilots area has been strengthened. And the passengers themselves would stand for it. The only way that a plane could be brought down today is by sneaking a bomb onto it, and that doesn't require aviation lessons. So Malkin's remarks are completely irrelevant.

The whole conversation is completely irrelevant. What we're seeing is more and more xenophobia in a world that's becoming more xenophobic by the day. We see Congress on the verge of passing extremely harsh, punitive laws directed at China, laws that will only invite equally harsh retaliation. In the past we described the sudden growth in popularity of the British National Party in the UK. And Holland became increasingly nationalistic when filmmaker Theo van Gogh was murdered by a Muslim extremist.

From the point of view of Generational Dynamics, every society becomes increasingly xenophobic during generational Crisis periods. This xenophobia increases as time goes on, and eventually grows into what can be called "hatred," leading eventually to a genocidal war. For those who believe that it can't happen, you should realize that it IS happening -- in the harsh laws targeting China and the other actions I've described.

As inane as the conversation between Morris and Malkin was, it's the standard level of discourse today. And the same thing is true in countries around the world. No wonder we're headed for a Clash of Civilizations world war. (6-Jul-07) Permanent Link
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Britain shocked by terrorist bombing plot by doctors in National Health Service

Britain reduced its terrorist threat level from 'critical' to 'severe' on Wednesday, for the first time since last weekend's attempted triple car bombings in London and Glasgow.

The level had been raised to 'critical' on Saturday, indicating that further terrorist attacks were thought to be imminent.

It remained at the 'critical' level for several days, longer than some people thought prudent, since it meant that policemen throughout Britain would be working very long hours, getting very little sleep.

The reduction of the threat level back to 'severe,' where it's been since last August, means that a new attack is considered likely, but not imminent.

The terrorists made the calls to the cell phones that were to trigger each London car bomb, but the bombs failed to ignite. Then, on Saturday, they attempted to explode an incendiary bomb as a suiciding bombing in Glasgow, and that failed as well. If it weren't for the terrorists' bumbling, the bombs would have killed dozens or hundreds of people.

The terrorist doctors

Gifted surgeon Mohammed Jamil Abdelqadar Asha, allegedly masterminded the terrorist bombings <font face=Arial size=-2>(Source:</font>
Gifted surgeon Mohammed Jamil Abdelqadar Asha, allegedly masterminded the terrorist bombings (Source:

But what has Britons REALLY freaked out is that the terrorist cell was a ring of foreign-born doctors in the National Health Service (NHS).

The alleged ringleader is a "gifted" surgeon, Mohammed Jamil Abdelqadar Asha, 26 years old, born in Jordan. Three doctors and two trainees are among the seven people being held for questioning in the UK.

Another doctor, Mohammed Haneef, an Indian, was detained in Brisbane, Australia, as he was about to board a plane with a one-way ticket to Malaysia.

This is causing a great deal of consternation in Britain, where 22,000 doctors in the NHS are foreign trained, or 40% of the total. The health industry was aghast at the development. "The news that members of a caring profession may be involved in these atrocities was even more appalling," said Dr. Hamish Meldrum, the new chairman of the British Medical Association in a statement.

It's thought that hospitals and the "medical fraternity" have provided a convenient network, allowing a terrorist leader to recruit other sympathetic professionals to his cause.

The generational connection

There's an article in Thursday's Wall Street Journal that attempts to answer the question of whether poverty is the "root cause" of suicide bombings. Based on research by Professor Alan B. Krueger, the article concludes that poverty has nothing to do with it.

Well duh, I could have told you that. Suicide bombings are explained by generational factors, as I described in a series of articles following the July 7, 2005, London subway bombings. This was summarized in last December's article on the MI5 chief's speech, saying that the U.K. population contains thousands of Islamic terrorists and sympathizers.

We're seeing that suicide bombers only come from societies that have entered generational Crisis periods, and not before. This indicates that when a society enters a generational Crisis period, the society becomes fundamentally changed, so that the creation of suicide bombers becomes possible. (And as I showed in my analysis on Iraqi Sunnis turning against al-Qaeda in Iraq, there are virtually NO Iraqi suicide bombers, since Iraq is in a generational Awakening era; they all have to be imported from Jordan or Saudi Arabia.)

Further findings, obtained by combining Generational Dynamics research with Robert Pape's study of suicide bombers, published in the book Dying to Win, we find that suicide bombers justify their terrorist acts as "altruistic suicide." Pape found that suicide bombers most likely come from countries occupied by another country, and his research shows that they come overwhelming from countries that have passed through a generational crisis era without having a crisis war. In these countries, the parents have accepted the occupation, albeit bitterly and reluctantly. But their impatient children take it upon themselves to free their parents' generation from this occupation by this unique form of altruistic suicide.

This generational explanation is supported by theory and is supported by the facts. But as I've said before, pundits, experts and journalists have a mental block that prevents them from grasping even the simplest generational connection, even when it's so obvious that it practically bashes them over the head with baseball bat. Their mental capabilities are limited to the subjects of poverty and class, and anything outside of those boundaries is as foreign to them as Sanskrit.

The Palestinian connection

Suicide bombers are in the young generation with an ethnic background in a country undergoing occupation.

In the case of the London subway bombers, the perpetrators had backgrounds in Pakistan and were bitter about the Kashmir region, disputed between Pakistan and India. They were England-born citizens, but had developed a generational "Hero - Prophet" relationship with radical clerics in Pakistan.

Last weekend's failed bombing attempts were perpetrated by foreign-born doctors with a Palestinian connection.

Here's a summary of suspects:

Before last weekend, I heard a pundit on TV make an interesting claim: That al-Qaeda isn't interested in perpetrating another terrorist attack in the U.S., unless it can be as spectacular as the 9/11 attack.

That may or may not be true of Osama bin Laden's closest al-Qaeda group, but al-Qaeda today goes well beyond bin Laden. It's become a "brand name" for a collection of loosely connected terrorist organizations, including al-Qaeda in Iraq, and al-Qaeda in the Islamic Maghreb (North Africa). It's also linked to other terrorist organizations, including the Jemaah Islamiah in Indonesia, and terror groups in Europe.

So, whether the pundit was right or not about bin Laden's original group, the network of al-Qaeda terrorist groups certainly doesn't feel so inhibited. Nothing illustrates this so clearly as the variety of connections: bin Laden was bitter about the American presence in Saudi Arabia, the London subway bombers were bitter about Indian control of parts of Kashmir, and last weekend's perpetrators were bitter about the Israeli "occupation" of Palestine.

From the point of view of Generational Dynamics, this is part of a continuing process of "identity group" formation. Al-Qaeda is gaining in strength, with groups stretching from southeast Asia to the Mideast to the Mahgreb and from there up to Spain and France.

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

However, as I've said before, I do not expect al-Qaeda to be one of major belligerents in the coming Clash of Civilizations world war, even assuming that al-Qaeda meets its objective of gaining control of some nation. That war will be fought between big powerful adversaries -- a new "axis" most likely consisting of China, Pakistan, North Korea and their allies, versus America, India, Russia and the UK and their allies.

The world is becoming increasingly fragile, in that the right kind of spark in any of several dangerous regions could trigger a regional war that would spiral into a world war, thanks to interlocking defense treaties. Al-Qaeda would probably not be a major belligerent in that war, but might well provide the spark that would spiral into the war.

From the point of view of Generational Dynamics, this spark could occur next week, next month, next year, or thereafter, but with al-Qaeda growing in power, and the world becoming increasingly fragile, it's going to happen sooner rather than later. (5-Jul-07) Permanent Link
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Iran's President Ahmadinejad facing a growing "generation gap"

Gas rationing and restrictions on women are infuriating the college-age generation.

 Stephen Colbert on Comedy Central's Colbert Report <font face=Arial size=-2>(Source: ABC)</font>
Stephen Colbert on Comedy Central's Colbert Report (Source: ABC)

On The Colbert Report this week, comedian Stephen Colbert described the current situation in Iran as follows:

"Earlier this week, the Iranian government started rationing fuel to its citizens, causing long gas lines and riots. This is fantastic news! Think about it! Gas lines! Rough economy! Social unrest! Iran is no longer a menace -- it's America under the Carter administration!"

Iran today is at the beginning of its generational Awakening era, America under the Carter administration was in the last half of its generational Awakening era, so it's no surprise at all that there are similarities.

In fact, President Mahmoud Ahmadinejad has pursued such heavy-handed policies in the areas of the economy and individual civil rights, that a major generational backlash is rising even more quickly than it did in America under the administrations of Presidents John Kennedy and Lyndon Johnson.

Gas rationing in Iran caused huge lines for gas and trashing of gas stations <font face=Arial size=-2>(Source: Der Spiegel)</font>
Gas rationing in Iran caused huge lines for gas and trashing of gas stations (Source: Der Spiegel)

People's anger spilled over into violence on Tuesday evening when Iran suddenly announced gas rationing regulations, just hours before they were to go into effect. Lines at some gas stations were almost a mile long, filled by motorists anxious to get their last full tank of gas before rationing took effect at midnight, limiting them to less than a gallon a day.

A dozen Tehran gas stations were trashed and set on fire this week, accompanied by chants lampooning President Ahmadinejad, who had come into office promising to end poverty and improve the economy.

Instead, Iran's economy has been getting steadily worse. Many young people blame Ahmadinejad for spending huge amounts of money on his misadventures in supporting Hizbollah in Lebanon and Hamas in Gaza, and ignoring domestic needs. And it hasn't been lost on people that Iran is the world's second largest oil producer, and so should be able to supply its own people with gasoline. (However, Iran has limited refining capabilities, so exports oil but imports gasoline.)

The economic problems might not cause so much conflict if it weren't for Ahmadinejad's heavy-handed approach to social issues, especially towards college students, women, the press and labor unions -- groups normally associated with support for individual civil rights.

In fact, Iran is in the midst of what is being called the most ferocious crackdowns on dissent in years.

To the outside world, the most visible sign of this crackdown is Iran's jailing of 150,000 ordinary women wearing loose headscarves, loose coats, or trousers, though most were released quickly to their parents or husbands. These jailings have increased as the warmer spring weather has led to more revealing clothing.

And last month, Ahmadinejad canceled at the last minute a major international women's soccer game in Berlin between German and Iranian teams. The women were to be wearing specially designed headscarves, and only women fans were to be permitted into the stadium, but the game was cancelled nonetheless.

Ahmadinejad has managed to do something so awful that every man who hears of it must be cringing: He's managed to get almost every young woman in Iran pissed off at him.

Ever since the ultraconservative Mahmoud Ahmadinejad became President of Iran in 2005, I've been writing that he should expect a great deal of political turmoil and opposition from college-aged kids, especially from women. This happens to every country entering a generational Awakening era, as Iran is, just one generation past the bloody Iran/Iraq crisis war.

But I didn't expect this. Ahmnadinejad seems to be taking every step possible to infuriate the younger generation, as if he were a bullfighter using his red cape to do everything possible to get the bull to gore him.

Other recent oppressive steps taken by the Iranian government include:

Although this seems to be crazy stuff, it actually makes perfect sense from the point of view of Generational Dynamics: Iran's leaders are attempting to relive the heady days of their youth, in the crisis war of the 1980s.

The current crackdown appears to have begun following a 21-March-2007 speech by Ayatollah Sayed Ali Khamenei, the recognized leader of the Islamic Revolution that began in 1979.

He called the new Iranian year "the year of national unity and Islamic harmony," and said:

"The national movement will be buoyed up in the New Year through by the firm will of the people and authorities as the nation would call for. ...

[The enemy challenges Iran through] sowing discord by demoting the Iranian national unity [and] inciting economic problems to slow down the country's progress. ...

[He cautioned about enemy's psychological warfare and vicious efforts to stir up differences between the Iranian people and the world of Islam.]

Under the pretext of sectarian feelings, religious inclinations and gild orientations, the enemies are bent on destroying unity of the Iranian nation or fan religious differences in the world of Islam and draw a wedge between the Iranian nation and the rest of the Islamic community by inciting war between Shiites and Sunnis.

[He affirmed that the sole way to frustrate enemies and thwart their plots lies in efforts to unite the nation and promote its integrity.]

In God's assistance, all people of every sect or religion will expedite their hopeful move towards their bright future. ... At the same time all Muslim nations will demonstrate their unity by promoting Islamic solidarity and fraternity."

What's interesting about this speech is how backward-looking it is. This isn't surprising, as old folks frequently want to relive their youth. In fact, as I've written many many times on this web site, today's Boomers in America are similarly trying relive the excitement and eroticism of their own youth in the 1960s. In the case of Khamanei, we see a different angle on this: An old person reliving a previous crisis war.

Islamic Revolution leader Ayatollah Khamenei and President Mahmoud Ahmadinejad on television on Saturday. <font face=Arial size=-2>(Source:</font>
Islamic Revolution leader Ayatollah Khamenei and President Mahmoud Ahmadinejad on television on Saturday. (Source:

Yesterday (Saturday), Khamenei appeared on Iranian TV with a new speech, praising Ahmadinejad for upholding the values of the Islamic Revolution, as he had demanded in his March speech.

Khamenei pointed to Ahmadinejad's "dauntless steps" and "perserverance" in the political and economic arena, and for upholding the values of the Islamic revolution.

"The president has underlined the ideology of the revolution in a time when the enemies are trying to create a climate of distrust by propagating that the Islamic revolution is losing edge. ...

The petrol rationing scheme is one of the dauntless moves made by the government which is to be continued by the officials."

These two speeches attempted to re-capture every symbol of the Iranian Revolution of 1979 and the Iran/Iraq war of these 1980s in the face of mounting political opposition:

Readers may recall that on several occasions I've expressed puzzlement about Iran's foreign policy since Ahmadinejad became President.

The reason for my confusion was that Ahmadinejad's policies were contradictory to the will of the people, especially the young people. For example, young Iranians don't approve of Americans in Iraq, but they are pro-American on cultural and social issues. Iranians want to develop nuclear technology, but they don't like to see Ahmadinejad sticking his thumb in the eye of the world, possibly provoking an attack on Iran's nuclear facility. So what is Ahmadinejad up to?

From the point of view of Generational Dynamics, a country's direction is determined by the attitudes and behaviors of large masses of people, entire generations. The behaviors of politicians aren't important except insofar as they reflect the will of the people.

So it was puzzling to me why Ahmadinejad was acting like a madman in international affairs -- threatening to wipe Israel off the map, denying the Holocaust, threatening weapons-grade plutonium development, and so forth. These things have infuriated the international community, they are not popular with the Iranian people, and they've been puzzling to me.

But finally things are falling into place. Ahmadinejad's policies are finally beginning to make sense, thanks to the current situation and Khameini's speeches.

All of Ahmadinejad's madman foreign policy actions are tied to exactly the same objective -- preserving national unity, renewing the spirit and ideology of the Islamic Revolution.

By provoking the West -- especially Western analysts and journalists -- into making direct or indirect invasion and bombing threats against Iran, Ahmadinejad is pursuing the same strategy that Khameini follows in warning of an American invasion -- he hopes to frighten young people into returning to the sense of national unity.

This is a very bizarre strategy of course. It's almost a desperate strategy. But it's consistent with the overriding objective -- the same objective that Presidents Kennedy, Johnson and Nixon had in the 1960s -- to restore national unity. The fact that the strategy is getting him into trouble, as the American's Presidents' strategies got them into trouble, is what always happens during a generational Awakening era.

Ahmadinejad is going farther than just words, of course. He's supplying weapons to terrorists in Iraq, Hizbollah in Lebanon, and Hamas in Gaza. He's playing the game "Let's you and him fight," referring to a psychological and social game described by Eric Berne in his book, Games People Play. I previously described how this game was played in the late 1980s in the lead-up to the Darfur war. It's actually not a rare game in international politics.

Ahmadinejad's game is very dangerous and very desperate. Presumably he wants to provoke a THREAT of war, but doesn't want to provoke an actual war, though we can't be sure of that, given his desperation. And even if provoking actual war is not his intention, he may certainly miscalculate, with unpredictable results.

His desperation is increasing with the reality that his policies are not working with the Iranian people, and cannot work; instead of unifying them, his policies are turning them against him. Khameini's speech on Saturday congratulating Ahmadinejad for his "dauntless steps," his "perserverance," and for upholding the values of the Islamic revolution will not convince anybody, and would be subject of much mockery in the college press if it weren't for the fact that such mocking would be severely punished.

From the point of view of Generational Dynamics, Iran is a dangerous wild card. If it were an isolated country, then I would say that this political conflict would go on for a few years, and eventually Khameini and Ahmadinejad would have to back off. The kids are bound to win this fight against their parents. There might even be a "velvet coup" peaceful change of government.

But Iran is not an isolated country; it's a country situated in the most volatile region of the world, with a desperate policy of provoking war threats all around it. How far this will go remains to be seen. (2-Jul-07) Permanent Link
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