Stock market rally raises cautious, anxious hope among investors.

Stock market rally raises cautious, anxious hope among investors.

The question is: Why is it happening, and how long will it last?

A couple of people have told me that they don’t want to talk about the stock market rally, and they aren’t even checking stock prices any more. From what I can tell, they’re afraid that by checking the stock prices, they’ll jinx the rally.

That’s little different from what I hear on CNBC and Bloomberg tv. The financial statistics are universally disastrous, but no matter what they are, the tv analysts dig through them desperately to find some “green shoot” that will indicate that the worst is over.

There are two things you should keep in mind about the current rally:

  • A rally of this size in the midst of a calamitous stock market plunge is not unusual. As I wrote six weeks ago in “Enquiring minds want to know: How long will the rally last?”, the stock market fell a full 90% from its peak in the years 1929-1932. During those three years, there were six rallies, including one 49% rally that lasted five months. So the current rally means nothing in terms of the overall direction of the market and the economy.
  • The predictions and analyses made on this web site are not based on just one or two months of data; they’re based on long-term trends going back years and decades. I started writing in 2002 that we were headed for a new 1930s style Great Depression. That was based on the fact that the stock market was historically overpriced. (See “How to compute the ‘real value’ of the stock market.”) The stock market is still overpriced by a factor of 150%. Price/earnings ratios have still been well above historical norms since 1995. The Law of Mean Reversion has not been repealed, and it means that a crash is coming with absolutely certainty.

Still, even though this rally is unimportant in terms of the longer term trend, we still want to know why it’s occurring, and how long it will last. The answer to this question would have to be speculation, so let’s speculate.

Based on what I’ve heard on CNBC and Bloomberg and elsewhere it appears to me that the pundits and analysts — the ones who make fat commissions by investing other people’s money — have put together a “story” to justify continuing to collect their commissions.

I’ve heard several analysts/pundits make remarks about Q3 corporate earnings to the following effect: Investors expect Q3 earnings to grow substantially compared to last year.

It’s worthwhile putting this in context. Ever since the credit crunch began in August, 2007, pundits have been predicting saying that “a bottom has been reached” on almost a daily basis. The slightest piece of good news is enough for the pundits to claim that the worst is over, and for web site readers to write to me and say, “See? You’re wrong. The worst is over.”

In particular, as earnings have fallen, quarter after quarter, pundits have been claiming that a revival of bubble-level earnings growth is only two quarters away. They make that claim every quarter. At the beginning of 2008, pundits were claiming that earnings would explode upward in the last two quarters. Now the same thing is happening in 2009.

So let’s refer to the Standard & Poors earnings spreadsheet and see what the “official” analyst estimates are. Here’s the table:

            Corporate earnings per share (EPS)
                 2008 (actual) 2009 (est)
          --   --------------- ----------
          Q1    $15.54         $7.32
          Q2    $12.86         $6.64
          Q3     $9.73         $7.46
          Q4   -$23.25         $7.09

Of the 2009 figures, the Q1 actuals are almost all in, so $7.32 is probably correct. The $6.64 estimate for Q2 is based on “guidance” provide by the companies along with their earnings reports, so these should be reasonably accurate.

After that, it’s really guesswork, but even so, Q3 estimates are sharply lower than Q3 actuals for 2008.

If you add together the four quarterly figures for 2008, you get (-23.25 + 9.73 + 12.86 + 15.54) = $14.88, the total S&P 500 earnings per share (EPS) for the entire year 2008. At the current S&P 500 index of about 930, the current price/earnings ratio is thus 930/14.88 = 62.

As I wrote last month in “Wall Street Journal and Birinyi Associates are lying about P/E ratios,” the official P/E is indeed around 60, and is being reported as such by Standard & Poors and by other mainstream financial firms. WSJ and Birinyi were reporting P/E = 13.09. The WSJ web site is now reporting 15.08, a mysterious figure that makes no more sense than the 13.09 figure.

Now let’s turn that computation around, to estimate what we can expect from the stock market this year, based on the S&P figures.

If you add together the four quarterly estimates for 2009, you get (7.32 + 6.64 + 7.46 + 7.09) = $28.51. These earnings estimates are almost double the actuals for 2008, though still way below the $60-80 earnings per share typical of the bubble years.

At $28.51 earnings per share for 2009, if we assume the fantasy P/E ratio of 15 published by WSJ, then we get that the S&P 500 index this year will be (28.51 x 15) = 430, corresponding roughly to a Dow Industrials index of 4300. Thus, based on actual, official figures, we can expect the market this year to fall well below Dow 5000.

The pollyannish “story” being painted by the commission-earning brokers and analysts is based on general euphoria from the Obama administration’s fiscal stimulus package, together with a few well-publicized cases where actual earnings turned out to be slightly less disastrous than analysts had previously predicted.

This “story” will serve the commission-earning brokers and analysts well, and will permit them to earn fat commissions for at least another quarter. When Q3 earnings start coming in, then they’ll have to come up with a new “story” to continue earning commissions for another quarter. That will undoubtedly include a promise that earnings rebounds are still just two quarters in the future, and that you should buy stocks today to get in on the ground floor.

It’s worth remembering, Dear Reader, that the same lethal combination of nihilistic Gen-Xers and incompetent Boomers that committed the fraud that led to the current financial crisis are the same people that you hear today on CNBC and Bloomberg tv or, for that matter, in the Obama administration. These include “brilliant” Nobel prize-winning economists like Krugman and Stiglitz. They’re EXACTLY the same people, and their only motivations are to continuing collecting commissions and to make sure that someone else is blamed for their own crimes and their own complicity. None of them gives a sh-t about the ordinary investor. They’re just in it for themselves.

So if you’re happy with those people, and with their performance in the past, then you should continue believing them. After all, if you ever start to question their motives, then you might jinx the rally.

There’s another very important aspect to all of this.

I heard an analyst on tv say that “capitulation hasn’t occurred yet,” referring to the fact that most money market funds haven’t yet been sold off. According to this analyst, the bear market won’t really end until we’ve seen true capitulation, including panicked selling of money market funds.

This refers to the hare-brained capitulation fallacy that I wrote about last year. Analysts used to talk about capitulation all the time last year, but they all expected it to have occurred long before now, so they’ve stopped talking about it. This analyst is saying that just because it hasn’t occurred yet doesn’t mean it won’t occur, and that it has to occur for a “true” market rally to occur.

From the point of view of Generational Dynamics, this kind of panicked “capitulation” is important as well, but for a different reason and with different consequences.

From the point of view of Generational Dynamics, we’re still waiting for a generational stock market crash, a huge, massive panicked selloff that will be remembered for decades as “the day the stock market crashed.”

At first this will appear to be the “capitulation” that pundits have been hoping for. But it will go far deeper than expected, and it won’t signal a new bubble stock market. Instead, the stock market will continue to fall, just as it did in the 1929-1932 period.

In August 2007 I posted the article “The nightmare is finally beginning,” expecting the crash to occur within a few weeks. Instead, the Fed and Treasury have found a way to use one “liquidity injection” after another to prop up some financial institution, in order to head off a chain reaction.

Throughout all this time, there was one statistic that I could count on to predict where the market was going in the short range: The P/E ratio — I mean the “real” P/E ratio, as shown in the chart on the bottom of the home page of this web site. Here’s a recent edition:


S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 17-Apr-2009. <font face=Arial size=-2>(Source: MarketGauge ® by DataView, LLC)</font>
S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 17-Apr-2009. (Source: MarketGauge ® by DataView, LLC)

If you look at the far right side of this chart, where the red circle is, you can see a huge spike in the last weeks, sending the P/E ratio off the chart, to around 60.

As you can see from this chart, the P/E ratio stayed at 18 for almost 4 years, from which I inferred that computerized buy/sell programs were programmed to maintain that valuation. Not that there was some conspiracy going on, but that they had all been programmed with roughly the same algorithms, one of which was to honor the valuation of 18.

A year ago, valuations started rising into the mid-20s, and I was expecting them to fall to 18 again — and they did in September of last year. That made sense to me.

But I never, NEVER dreamed that what’s happening now could happen — starting in January, as Q4’s negative earnings were coming out, the P/E ratio indexes shot up to 60, and then the whole fabric of lying and deception began, as I described in “Wall Street Journal and Birinyi Associates are lying about P/E ratios.”

What I infer is this: That this change has caused all the buy/sell programs to be reprogrammed to ignore the real P/E and use the Ouija board version computed by Birinyi Associates and published by WSJ. This was done by brokerage firms to protect their commissions, so that they could continue suckering ordinary investors.

This insanity is so great that it’s hard for the mind to grasp. The way I look at it is that it’s like stretching a rubber band to its limit, and when it snaps back, it will snap back much faster and harder than it would have otherwise.

Stein’s Law: If something cannot go on forever, then it won’t.

I know I keep saying this, but I just can’t believe what’s going on in Washington and on Wall Street. Even as cynical as I am about the lethal combination of Gen-Xers and Boomers, there is absolutely nothing in my experience that prepares me for this and allows it to make sense to me. If this were happening in a movie, I could enjoy it. But in real life, things are spinning so rapidly out of control that it makes me literally dizzy and sick when I think about it.

And so, Dear Reader, if you plan to stay in the stock market because your assets had lost over 50% of their peak value, and now are down only 40% of their peak value, then let me assure you that this current rally is a “bear market rally.” It is nothing unusual in times of severe market plunges, and it means nothing in the longer term. Furthermore, P/E ratios are still astronomically high, and have been far above historical averages since 1995. Much worse is yet to come.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (9-May-2009)

In a fragile world, a swine flu pandemic would have geopolitical consequences – Also: The big economic impact may trigger new financial crises.

In a fragile world, a swine flu pandemic would have geopolitical consequences

Also: The big economic impact may trigger new financial crises.

Right now officials are still unsure, but by mid-week they’ll have a pretty good indication of how serious the new swine flu outbreak is — how many people are likely to get sick, how many people are likely to die, and how much the outbreak will affect the economy.

Experts have been saying for years that the world is overdue for a major flu pandemic, such as occurred 3 times in the 20th century. It may or may not be avian (bird) flu, and it may or may not be the current swine flu outbreak, but it’s going to happen.

When it does, here are the estimated costs of flu pandemic: Some $3-5 trillion in worldwide economic loss, about 20% of that in the US, and the deaths of 50-100 million people.

In ordinary times, the world might be able to absorb this kind of loss without catastrophic consequences. But things are different today. The world is very fragile. I’ve described today’s world as being in the Age of Great Compromises, because the leaders of every country are committed to maintaining the status quo, for fear that any change will trigger a war or financial catastrophe.

However, today’s world is already on the edge of disaster. The Fed and central bankers around the world are running around like chickens with their heads cut off, patching up every financial institution before it can collapse.

An analysis by Ambrose Evans-Pritchard of the Telegraph shows how futile this effort is. Evans-Pritchard frames the growing financial crisis in simple macroeconomic terms: There simply is not enough money in the world anymore.

“The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere. …It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds.

The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies.”

This is the stuff of a deflationary spiral. During the bubble there was too much money in the world, causing asset prices to inflate artificially. Today there’s a shortage of $6 trillion in the world, just to help economies to survive.

Furthermore, this $6 trillion shortage isn’t a static value. Money is vanishing as governments, financial firms and hedge funds reduce leverage and write down the values of the toxic assets in their portfolios. It’s quite possible that an additional trillion dollars or so disappears every month. The central banks of the world can’t possible “print money” with quantitative easing that quickly. They simply can’t keep up.

And now we face the possibility of a swine flu pandemic that could cost the economies of the world another $5 trillion dollars. This is something that destroys the status quo that the world’s leaders want to preserve at all costs.

The Evans-Pritchard article points out that:

“Great bankruptcies change the world. Spain’s defaults under Philip II ruined the Catholic banking dynasties of Italy and south Germany, shifting the locus of financial power to Amsterdam. Anglo-Dutch forces were able to halt the Counter-Reformation, free northern Europe from absolutism, and break into North America.Who knows what revolution may come from this crisis if it ever reaches defaults. My hunch is that it would expose Europe’s deep fatigue – brutally so – reducing the Old World to a backwater. Whether US hegemony remains intact is an open question. I would bet on US-China condominium for a quarter century, or just G2 for short.”

The above references the great Spanish bankruptcy of 1557, the major bankruptcy that preceded Tulipomania (1637).

But there’s an even better historical example — the Black Plague of 1347-51. Here’s a map showing the spread of the bubonic plague:


Spread of Bubonic Plague in Europe, 1347-51 <font size=-2>(Source: urbancartography.com)</font>
Spread of Bubonic Plague in Europe, 1347-51 (Source: urbancartography.com)

According to one history of the Black Plague, “In Milan, when the plague struck, all the occupants of any victim’s house, whether sick or well, were walled up inside together and left to die. Such draconian measures seemed to have been partially successful; mortality rates were lower in Milan than in other cities.”

These kinds of emergency measures might be taken again, if the outbreak turns into a highly pathogenic bird flu pandemic.

The Black Plague came at a time when things were already terrible in Europe. There had been a huge currency bubble in Italy for two decades, and Italian banks started collapsing in 1343.

In France, the Hundred Years War had been raging, and the English won a huge victory by capturing the port of Calais on August 4, 1347, destroying France’s economy.

The biblical book of Revelations characterizes a crisis war with the “Four Horsemen of the Apocalypse”: Pestilence, War, Famine, and Death. Europe suffered all of those things in the 1340s-50s, and the continent was devastated.

Today, the world is headed for a new banking and financial crisis, a new world war, and new famines. The swine flu virus might fizzle, but if it doesn’t, then it will be the new pestilence.

(Comments: For reader comments, questions and discussion, see the Swine Flu Pandemic thread of the Generational Dynamics forum.

Also see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (27-Apr-2009)

Wall Street Journal and Birinyi Associates are lying about P/E ratios – The stock market will fall below Dow 3000 with 100% certainty. Any belief otherwise is simply wishful thinking.

Wall Street Journal and Birinyi Associates are lying about P/E ratios

Their figures don’t make sense, and they differ from everyone else’s.

I’ve complained many dozens of times on this web site for several years that journalists and analysts constantly lie about price/earnings ratios (also called “valuations”), in order to support the stock market bubble. But what’s going on at the Wall Street Journal really takes the cake. These people have no shame.

Last month I wrote “Analysts and journalists freak out as Q4 2008 earnings turn negative.” In that article, I provided several different sources for current price/earnings ratios, including the Decision Point Earnings Summary, the Comstock Funds page, and a spreadsheet file from Standard & Poors.

Let’s take a look at the latest figures from the official Standard & Poors spreadsheet:

                 Estimated Price/Earnings ratios based on
    Period     Operating Earnings         "As reported" earnings
    -------    ------------------         ----------------------
    Q4 2010        11.21                           24.07
    Q3 2010        11.77                           24.58
    Q2 2010        12.36                           25.38
    Q1 2010        13.17                           27.57
    Q4 2009        14.11                           29.82
    Q3 2009        19.73                         -464.52
    Q2 2009        19.95                         1932.00
    Q1 2009        18.82                          127.64

As I wrote last month, “operating earnings” is essentially a meaningless figure, supposedly equal to earnings, but not counting so-called one-time expenses. Since writing down toxic assets is a “one-time expense,” the tens of trillions of dollars in losses from toxic assets are being ignored in “operating earnings,” although their fraudulent nominal value was of course included with “earnings” during the credit bubble.

The only valid values for P/E ratios are based on “as reported” earnings — that is earnings that public corporations report every quarter, following very strict accounting rules.

The figures 127.64, 1932.00 and -462.52 look like errors, but they’re not. They’re based on the previous year’s earnings (“12 month trailing earnings”). Earnings turned negative in Q4, so they’re small but still positive for the entire past year. By Q3 of this year, it’s estimated that earnings for the trailing year will be negative, so the P/E ratio turns negative.

This should be a really huge news story, especially for WSJ and CNBC and for other financial media. Instead, they’re doing worse than ignoring it; they’re making up numbers to hide from the public what’s going on.

I would also add that the principal financial bloggers are ignoring this as well. I don’t follow all of these blogs every day, but I’ve never seen any mention of this huge story on Nouriel Roubini’s blog, Michael (“Mish”) Shedlock’s blog, the Calculated Risk blog, the MinyanVille blog, Yves Smith’s Naked Capitalism blog, or the Financial Times alphaville blog.

One way for journalists and analysts to “cheat” is to use made-up “operating earnings,” and that’s what a lot of them have been doing. But you can see from the above table that the current P/E is 19.95 for Q2, based on current S&P 500 index of about 850.

As we’ll show below, the Wall Street Journal is reporting a current P/E of 13.09. Well, where the hell did that number come from?

Before going into that, let’s see what a couple of other financial firms are reporting.

First, let’s take a look at the following chart. There’s a price/earnings ratio chart at the bottom of this web site’s home page, and it gets updated automatically every week. Here’s last Friday’s version of the chart:


S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 17-Apr-2009. <font face=Arial size=-2>(Source: MarketGauge ® by DataView, LLC)</font>
S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 17-Apr-2009. (Source: MarketGauge ® by DataView, LLC)

If you look at the far right side of this chart, where the red circle is, you can see a huge spike in the last weeks, sending the P/E ratio off the chart, up above 40.

Next, let’s take a look at the chart from the Decision Point Earnings Summary:


Earnings, price/earnings ratios, yields and prices -- 1926 to the present <font size=-2>(Source: Decision Point)</font>
Earnings, price/earnings ratios, yields and prices — 1926 to the present (Source: Decision Point)

Once again, if you look at the area of the red circle, you can see the huge spike, off the chart.

So it’s not as if everyone is following WSJ’s lead.

Now let’s look at what WSJ has been doing. And I’d like to thank “Freddyv” in the Generational Dynamics forum. He has been following this issue and working on it for several months, and much of this analysis comes from him.

Let’s look at the following two charts from the Wall Street Journal site:


Wall Street Journal P/E charts.  Top: 29-Jan-2009.  Bottom: 24-Apr-2009. <font size=-2>(Source: WSJ)</font>
Wall Street Journal P/E charts. Top: 29-Jan-2009. Bottom: 24-Apr-2009. (Source: WSJ)

The top chart, from January 29, 2009, shows an S&P 500 ratio of 15.72. Supposedly, that figure is: “P/E data on as-reported basis from Birinyi Associates.” But that figure is already a lie. If you look at the above two charts from MarketGauge and Decision Point, you can see the P/E ratio was above 18 all year, and has been well above 15 for ten years.

There’s no way that the January 29 figure is based on “as-reported” earnings, as the chart claims. In fact, even “operating earnings” don’t justify that figure, so I have no idea what figures they made up to justify that figure.

But it gets worse in the latest chart, for April 24, 2009, shown on the bottom.

First of all, notice that the claim “P/E data on as-reported basis from Birinyi Associates” has been removed. “Freddyv” says that they removed that claim when he wrote to the WSJ demanding an explanation. The WSJ didn’t respond to him, of course, but they did remove this obvious lie from their web site.

But even if they’re using “operating earnings,” where the hell did 13.09 come from? The official numbers from Standard & Poors are much higher than that, as we saw above.

Not only that, 13.09 is lower than the January 29 figure, 15.72, but the S&P 500 index is almost the same. How is that possible?

There is no way to justify these figures rationally. So where did they come from?

Well, WSJ gets the figures from Birinyi Associates, and we can get a clue from the Birinyi Associates web site. Here’s what it says right at the top of the home page:

“Our approach is to understand the psychology and the history of the market.Birinyi Associates is a stock market research and money management firm. Our approach is to understand the psychology and history of the market, and most importantly the actions of investors. Much of our effort involves Money Flows, or what has traditionally been called ticker tape analysis.

Our daily, weekly and monthly research provides detailed market analysis as well as individual stock picks to individual and institutional investors. From our Chart of the Day to our Reminiscences newsletter, we believe that all of our services will prove to be a profitable investment of your time.

Please take the Birinyi Tour to learn which service is right for you and Subscribe today!”

I’m sorry, Dear Reader, but I can’t stop laughing every time I read this. The Wall Street Journal, CNBC, Bloomberg News, and financial journalism in general have sunk so low that they actually depend on garbage like this. I’ll make the same remark that I made in “Vile ‘teabagging’ jokes signal the deterioration of CNN and NBC news:” I don’t see how the financial journalists could become any worse (though I’m sure they’ll find a way).

So, apparently, Birinyi Associates do not depend on actual figures to reach their conclusions. They’re a touchy-feely group of analysts. They analyze the psychology of the investor, possibly confirm their estimates with a handy Ouija Board and the local soothsayer, and pass those numbers on to the Wall Street Journal for publication. Incredible!!! They’re an embarassment to the financial community and to the financial journalism community, but they’re the norm today.

And so, Dear Reader, that’s how the Wall Street Journal arrived at the P/E ratio value of 13.09.

And that brings us back to the question that everyone wants an answer to: How long will the current stock market rally last?

As I wrote last month, the stock market fell 90% from 1929 to 1932, but during that three year period, there were numerous rallies, one as long as five months. So the current rally is not exceptional, even in the current worsening financial crisis. But how long will it last?

We can get a clue by comparing today’s stock market fall to the one from 1929 to 1932. Here’s a chart from dshort.com that compares them:


1929-32 versus today - Four Bad Bears <font size=-2>(Source: dshort.com)</font>
1929-32 versus today – Four Bad Bears (Source: dshort.com)

In the above chart, compare the period 1929-32 (shown in grey) to the period since October 2007 (shown in blue). In particular, if you look at the current rally (the end of the blue line), it appears to be leveling off, which indicates that the rally is just about at an end. If you compare the current rally with previous rallies in 2008 and in 1930-32, you can see that if history repeats itself, then we can expect a sharp plunge in the next few weeks.

For more thoughts about the path of the stock market today, check out “Timing the Depression” on Matt Stiles’ Futronomics blog. This article has some of the latest charts showing the worldwide economic collapse.

But whether the rally ends now or later, it must end because corporate earnings are crashing, and because price/earnings ratios are going through the roof. This is not a “maybe,” and this is not something that will happen unless President Obama does “X”. There is nothing that can be done.

This shameful episode of lying by the WSJ about P/E ratios is nothing new. I’ve been giving similar examples for years.

This is just one more example of why you’ll never get a straight answer about anything from WSJ or CNBC or any of the other financial media, or even from the financial bloggers, even from the “doom and gloom” Nouriel Roubini.

Once again, I would like to warn web site readers against the easy seduction of believing that “the worst is over,” that “there’ll be nothing worse than long recession” and that “there won’t be a panic.”

There is absolutely no possibility that any of these things are true. There is no theoretical support for any of these views, and there are no historical examples of these scenarios. The stock market will fall below Dow 3000 with 100% certainty. Any belief otherwise is simply wishful thinking.

Nothing has changed. The Law of Mean Reversion has not been repealed by the Wall Street Journal or the Obama administration. Since the stock market has been far overpriced since 1995, as I described in “How to compute the ‘real value’ of the stock market,” and since the Law of Mean Reversion still applies, there must still a generational panic and crash in store.

It could come next week, next month or thereafter, but it’s coming with absolute certainty, and nothing that has happened or is being planned has any possibility of stopping it, no matter how many manufactured numbers the Wall Street Journal publishes.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (26-Apr-2009)

Sri Lankan Army Systematically Raping Women Fleeing from War Zone

Sri Lankan Army Systematically Raping Women Fleeing from War Zone

Generational dynamics in action people, its coming to a community near you.  America will rebel and revolution will become reality.

Though there have been numerous reports indicating that the Sri Lankan Army (SLA) has been systematically raping Tamil women fleeing the country’s war zone for the past four months, the Sri Lankan government’s brutal methods of media censorship have almost entirely prevented these stories from being publicized. The most notable exceptions are two articles in the Tamil media, one that reported “130 women were taken for sexual abuse” after fleeing the war zone by SLA soldiers, and one that described “shocking stories of sexual violence meted out” to Tamil women civilian detainees in military-run detention camps. However, the untold personal accounts from witnesses and victims of these crimes are countless.

In February, a doctor in the Vavuniya hospital, speaking on the condition of anonymity, reported that he had an entire ward full of women who had been raped by soldiers, many of whom had bite marks “all over their bodies.” In March, a woman who is being forcibly held in a female-only “transit camp” reported the soldiers had raped virtually every detainee in the camp while taking them outside individually to “interview” them about possible connections to the rebel Tamil Tigers (LTTE). Another anonymous source, who is involved in disposing dead bodies from the conflict zone, said that the majority of bodies of women who the army claims were LTTE members had been raped.

The Sri Lankan military has a long history of raping Tamil women with complete impunity. A 2002 Amnesty International report said there had been “a marked rise in allegations of rape by police, army and navy personnel” and that “not a single member of the security forces has been brought to trial in connection to incidents of rape in custody.” In 2000, the Asian Human Rights Commission issued a statement that “impunity continues to reign as rape is used as a weapon of war in Sri Lanka”.

However, the current level and pattern of rapes is likely unprecedented, suggesting that they may be acts of genocide. Rape has historically been a trademark of genocide, with Rwanda, Darfur and Bosnia being prime examples. According to Former US Ambassador for War Crimes David Scheffer, “rape can be so well planned and done on such a mass scale as to wipe out much of an ethnic group just as thoroughly, if more slowly, than large-scale murder”. He explains that for

women who had been raped during the atrocities in the Balkans, Sierra Leone, Uganda and the eastern Congo…the experience was devastating to their character, their ethnic bonds and often to their physical health. Even if they were still physically able to bear children, these women typically were ostracized from their communities and could not marry their ethnic men…mass rape can destroy a substantial part of a group and thus constitutes genocide.[1]

The UN Genocide Convention requires its parties – which include Canada, Australia, the USA, the UK and 136 other countries – to “prevent and punish” genocide, “whether committed in time of peace or in time of war”. Classifying the rapes and other atrocities currently being committed in Sri Lanka as genocide is therefore crucial to stopping them.

……

[1] According to international law, acts that cause “serious bodily or mental harm to members of the group or deliberately inflict on the group conditions of life, calculated to bring about its physical destruction in whole or in part” constitute genocide.

Stories of massive generational fraud and corruption continue to pour out

Stories of massive generational fraud and corruption continue to pour out

Long-time readers of this web site know how much my life has been affected by the things I’ve been writing about. Writing online is no meaningless ideological game to me, as it is for the bloggers you read elsewhere.

This web site has turned into far and away the most important and significant achievement of my entire life, and I’m very proud of the fact that I’ve helped hundreds, perhaps thousands, of people save their families’ lives by telling them how to protect their assets.

But nothing has affected me more than writing about the massive fraud and corruption that has permeated finance, journalism and politics.

As I’ve said many times over six years, the stench of corruption has sickened me. There are literally times when I came very close to vomiting right at my computer keyboard. And I can’t begin to count the number of sleepless nights I’ve had since I started this web site in 2002, as I foresaw what was coming, and how everything I foresaw was coming true.

And the sickening stench hasn’t ended. The same greedy, destructive Boomers and Gen-Xers who brought about this disaster are continuing to do so and continuing to lie about it.


Industrial collapse in Canada, Japan, Germany, Italy, France, USA and UK <font face=Arial size=-2>(Source: jessescrossroadscafe.blogspot.com)</font>
Industrial collapse in Canada, Japan, Germany, Italy, France, USA and UK (Source: jessescrossroadscafe.blogspot.com)

One of the slimiest performances I’ve seen was last week’s presentation at Washington’s Economic Club by Lawrence Summers, White House National Economic Council. Summers bragged about his life’s accomplishments and then, smiling smugly, he said, “I think the sense of a ball falling off the table — which is what the economy has felt like since the middle of last fall — I think we can be reasonably confident that that’s going to end within the next few months and you will no longer have that sense of freefall.”

Well, you can just look at the above graph and see that he’s lying. Industrial production figures in all the G7 (developed) countries have been like “a ball falling off the table.” And you can look at all sorts of other data. There’s absolutely nothing to justify Summers’ claims.

Now, I don’t really care if someone makes a lot of money, even someone like Summers, who made $5.2 million in 2008 from hedge funds, plus $2.7 million in speaking fees, and who also consulted for hedge funds when he was President of Harvard University. If the Harvard University trustees don’t care, then why should I care?

But I’m offended when someone like that becomes the economic front man for the Administration, and then openly lies, especially after a year of hearing a lot of crap during the campaign that the Obama administration was going to be completely open and honest, without even the appearance of impropriety.

But I don’t mean to pick on just Summers. He’s just an average person in a world where the average person is a crook. The same generations of people who perpetrated the fraud, who created the worthless mortgage-backed securities and worthless CDS securities contracts, and sold them to the public as risk-free AAA securities are still in charge. Those people haven’t disappeared; they’re still pulling scams. They’re just using new variations, to take advantage of this year’s opportunities.

I’ve been writing about these scams for years, as regular readers of this web site know. One of the most disgusting was the subprime mortgage company that I wrote about last year in January. They had made huge sums of money by defrauding thousands of people by talking them into lying on their mortgage applications, and had defrauded the lenders through these falsehoods.

The reason that that story caught my attention was that the Boomer executive vice president, 59, was married to a Gen-X wife, 37. When the company went bankrupt, the wife decided to dump the husband and take the kids (why not?), in order to get as much money as possible. The husband killed his wife, then killed himself.

And even after all this, the remaining company officers were in bankruptcy court requesting that all remaining money be split among them as bonuses, rather than give it to some of the people who had been defrauded.

For some reason, this story epitomizes all that’s been going on. Greedy, selfish, destructive Boomers and Gen-Xers, willing to destroy anyone else’s life for their own gain, and committing further destruction when their attempts are foiled. The standard today in government, business and journalism is of dishonesty and unethics (is that a word?).

I recall a job interview from late 2007, just after the credit crisis began. (For why I was looking for a job, see “Boomers and Gen-Xers: Dumbing down IT / How Digimarc Corp. self-destructed.”) I was talking to a company VP, and as was my obsessive habit, I warned him that there was a great deal of fraud going on in the world, and that he should make sure that his company’s assets were safe. He said, “So you think everyone in the world is a crook?” I knew he thought I was nuts, and of course I didn’t get the job.

So what’s interesting to me now is that the stories behind all of these frauds that I’ve been writing about for years are starting to come out. If anything, what I wrote in the past underestimated the situation.

I’ve written about the “culture of complicity” that pervades today, and the overwhelming circumstantial evidence that proves that people were knowingly committing fraud.

In a airing of Bill Moyer’s journal, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, described what’s been going on:

“BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you’re talking about was created out of things like liars’ loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That’s why it’s toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it’s scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I’m quoting Fitch, the smallest of the rating agencies, “the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined.”

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars’ loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.”

Black doesn’t name any names, unfortunately, but makes a general argument like the one I’m making — that the fraud was so massive, that everyone must have been involved.

In another part of the interview, he does name two government regulators who failed to do their jobs:

“WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine.These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator.”

Black indicts both Treasury Secretaries — Hank Paulsen and Timothy Geithner — and I can only agree. In this “culture of complicity,” neither of them could blow the whistle or tell the truth without exposing their own complicity in the repeated fraud.

Another article, written in December, does name names, and gives specifics for how the fraud was perpetrated.

The article was written by Michael Lewis. In the 1980s, at age 24, with no business experience whatsoever, he stumbled into a job paying him a six-figure salary to advise investment bankers about something he knew nothing about. After a few years, he got out while the getting was good, and wrote a book called Liar’s Poker about his experiences:

“I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.”

Lewis was shocked at this response at the time, and indeed it’s still shocking today. These were Generation-X students at Ohio State University looking for ways to get into the business of defrauding people. What kind of college must Ohio State University be to graduate a class of crooks? It’s pretty safe to say that ethics is not a strong point at Ohio State.

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But of course I don’t mean to pick on Ohio State. Every college was like that. It’s not the college, it’s Generation-X, kids who were (and are) infuriated by what they see as the stupidity of the Boomers in whose shadow they grew up, kids who rejected every value that their parents and teachers tried to teach them, and who glorify stupidity and fraud.

(See “The nihilism and self-destructiveness of Generation X,” and “Reader comments on the Nihilism of Generation-X.” For more information on generational archetypes, see “Basics of Generational Dynamics.”)

Lewis’ article is fascinating, because it explains exactly how and why collateralized debt obligations (CDOs) and credit default swaps (CDSs) were introduced in a big way into the securitization business.

Each development had one and only one purpose: To make more money at investment banks, while screwing investors. “I was just appalled,” says Steve Eisman, also an Xer. “People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”

Eisman was a hero to Lewis, because Eisman tried to warn everyone that the securities market was headed for disaster. But no one listened because everyone was making too much money, screwing investors.

One of Lewis’ villains was Greg Lippman, a mortgage-bond trader at Deutsche Bank, and also an Xer:

“What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’?” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”

Well, here we have a problem, don’t we? We have Lippman selling securities, telling Eisman to make money by betting that the securities will lose money. I’m not a lawyer, but isn’t that securities fraud? It sure looks that way to me. How come nobody is arresting Lippman?

When I talk about the aggressive, destructive role that Gen-Xers played in the current disaster, I often get an indignant reply. “We were working for Boomers, and we did what they told us to do, because we had to, or we would have been fired.”

I usually answer, “If your Boomer boss asked you to kill his wife, would you do that too?”

What’s clear from Lewis’ account was this was almost an entirely Gen-Xer run scheme. When I read these stories, I never read about Boomers playing anything but a passive role. Some Xers are heroes, some Xers are villains, but all the actors are Xers. The Boomers don’t figure in any of these stories. It’s all about Xers.

By no means does that excuse Boomers. Boomers were still the bosses, and Boomers let it all happen. In fact, with fraud so pervasive, there’s no doubt that they all knew that it was going on, but didn’t object because they too were making money, and didn’t care who got screwed.

That’s why on the web site I’m always talking about the “lethal combination of greedy, nihilistic Gen-Xers, together with greedy, stupid Boomers.” What’s happened these last few years could not have occurred without the active cooperation of both Xers and Boomers. Xers were needed because of their contempt for values, and their willingness to destroy anything or screw anyone, in order to benefit themselves. Boomers were necessary because they had no moral values whatsoever, and they let the Xers do it, in order to benefit themselves.

In the end, Eisman summarizes the situation as follows: “That Wall Street has gone down because of this is justice. They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

Isn’t that amazing? Not one person. That’s not surprising, when you consider that I’ve never heard anyone on tv apologize for what he he’d done. It’s always someone else’s fault.

For me personally, I feel a small element of pride that everything I’ve been writing about for the last few years has turned out to be completely true, and people who called me names were completely wrong. But that small element of pride is still overwhelmed by the enormous feeling of revulsion at what’s been going on. And I’m not going to get much sleep tonight either.

I still sometimes feel like vomiting sometimes. I felt like vomiting last week when when I heard Larry Summers give his slimy speech, taking pride in what he’s accomplished, and saying that everything is going to be OK. Summers has been a full, active participant in the massive fraud of the last few years, and now he’s just continuing the fraud as Secretary of the Treasury.

Do you remember when the credit crunch first broke, in August 2007? At that time they were discussing how many of these toxic assets (as we now call them) existed. The optimists on CNBC said that there were less than $100 billion of them around. The pessimists on CNBC said that there were many $200 billion.

Well, guess what? Banks and insurance companies have already confessed to having $1.29 trillion in toxic debt, and last week the International Monetary Fund (IMF) indicated that they would reach $4 trillion.

And even that won’t be the end.

Mike Mayo, an analyst at Calyon Crédit Agricole, analyzed the holdings of 11 major banks and found that, on average, loans have only been marked down to 98 cents on the dollar. This indicates that debt-related assets have much farther to fall, and that the $4 trillion will be far exceeded. The volume of toxic assets keeps going up every week, and I expect it to reach tens of trillions before it’s all over.

There’s another angle to this. The government is supposedly “stress testing” various banks, to find out the size of their toxic debt exposure, and whether the banks can survive. Well, the Fed has ordered the banks to keep quiet about the results of the stress tests. You can be sure that if the banks were passing the stress tests, they’d want everyone to know. So you can be sure that they’re failing. It’s just more lies, deception and fraud by the Administration that repeatedly spewed crap promising to be open and transparent, without having even the appearance of impropriety.

On another subject, President Obama has announced that his Administration will end deficit spending. They’re going to do this with the most massive spending program in the history of the universe — trillions in bailouts and stimulus, curing global warming, and implementing universal health care. Apparently President Obama believes that the way out of debt is to go infinitely deeper into debt.

Well, here’s the assessment of the nonpartisan Congressional Budget Office (CBO):


Projected government deficit <font face=Arial size=-2>(Source: washingtonpost.com)</font>
Projected government deficit (Source: washingtonpost.com)

As the graph shows, the CBO “concluded that President Obama’s budget would rack up massive deficits even after the economy recovers.”

And so, we have worldwide industrial production crashing around the world, and worldwide trade and transportation have come almost to a standstill.

There is no way that anything remotely like Summers’ giddy forecast is going to come true, and Summers knows it.

This is turning out to be a big joke. I’d laugh, except I think I’m feeling sick again.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (14-Apr-2009)

New book, “Unhappy China,” stokes Chinese nationalism and anti-Americanism.

New book, “Unhappy China,” stokes Chinese nationalism and anti-Americanism.

Runaway bestseller in China worries Beijing and the west.

It was exactly one year ago today that I posted the article, “Chinese embarrassment and anger grows over Tibet and Olympics.”


<i>Daily Mail</i> story referencing "Horrible Chinese thugs"
Daily Mail story referencing “Horrible Chinese thugs”


<i>Der Spiegel</i> story saying, "There's no way people like that should be allowed on our streets."
Der Spiegel story saying, “There’s no way people like that should be allowed on our streets.”

That was the time before the summer Olympics games in Beijing. Chinese athletes were carrying the Olympics torch around the world.

A London newspaper called them “horrible Chinese thugs,” and a German magazine’s headline read, “There’s no way people like that should be allowed on our streets.”

This took place after the bloody riots in Tibet where, from the point of view of the Chinese, the Western media automatically took the side of the Tibetans. The Chinese were furious at the West, and there was so much paranoia on both sides that some kind of major confrontation somewhere was a possibility.

However, an act of nature turned things around, when the horrible Sichuan earthquake in May began a period of international good will directed at China. The good will carried through the Olympics games, allowing them to be an international triumph for the Chinese.

But many Chinese have not forgotten the enormous humiliation that the West visited upon the Chinese a year ago, and now we’re beginning to see some of the repercussions.

A new book, called “Unhappy China – The Great Time, Grand Vision and Our Challenges,” was published a month ago in China. The book is highly nationalistic, and highly anti-American and anti-West. And the book is a best seller, selling out of its first printing, 100,000 copies, in 11 days.

Here is one published summary of the book:

“A new bestselling book, Unhappy China, is stirring debate in China and alarm in the West because of its aggressive nationalism. Millions of web pages have sprung up to address the book since its release last month. In the book, five Chinese scholars assert China’s impending superiority as the world’s leader, advocate a hard line against their “enemies,” and express dissatisfaction with the West’s treatment of China.


Unhappy China
Unhappy China

The authors, Wang Xiaodong, Liu Yang, Song Qiang, Huang Jisu, and Song Xiaojun, denounce Western influences and specifically deride the United States for being “irresponsible, lazy, and greedy, and engaged in robbery and cheating.” They blame the United States for causing the current global recession. The authors urge the Chinese people to “conduct business with a sword in hand.” They call for the emergence of a group of heroes to “lead our people to successfully control and use more resources, ridding [the world of] of bullies and bringing peace to good people.”

Writing in Southern Metropolis Daily, Jing Kaixuan observes, “When I first heard about the book Unhappy China, I thought it was probably about how laid-off workers were unhappy, or about how peasants who had lost their land were unhappy. Maybe it was about how college graduates searching for work were unhappy, about how stock market investors were unhappy, or about how victims of the poisonous milk powder scandal were unhappy.” Instead, the authors of Unhappy China divert attention away from domestic ills and blame China’s problems on foreign enemies.”

Condemnation of the book by Chinese politicians and scholars has been swift.

The state-controlled Xinhua news service immediately published an article with the headline, “Book rallying for social change fails to inspire the masses.” They apparently published this article because they were afraid that the book WAS inspiring the masses.

The Xinhau article provides additional information about the book itself:

“The book argues that “with Chinese national strength growing at an unprecedented rate, China should stop self-debasing and come to recognize the fact that it has the power to lead the world, and the necessity to break away from western influence.”The book says “the current financial crisis reflects an overall corruption of the American society.

The book advocates more stern foreign policies.

“We should incorporate retribution and punishment into our diplomatic strategies, especially when dealing with Sino-French relations,” referring to the meeting between French President Nicolas Sarkozy and the Dalai Lama in December last year.

The authors believe ordinary citizens should not be deprived of national development benefits, and that China should have the ambition to reestablish the world order, assume a leadership role among nations and achieve industry upgrading amid the current global financial crisis.”

However, the Xinhua article quotes a saleswoman at a book store as saying, “It does not sell well. Few people linger at this section.” I guess in China even booksellers have to tell the authorities only what they want to hear.

From the point of view of Generational Dynamics, what’s important is not the attitudes of the politicians, but the attitudes of the large masses of people, entire generations of people.

The fact is that this book is extremely popular, and is particularly directed at young people. This means that the book’s “message” might well be extremely important in determining the direction in which China is going.

That’s why I found it interesting to read a published interview of Shanghai scholar Xiao Gongqin, discussing the nature of Chinese nationalism.

Xiao says that China’s nationalism has been “marked by a reactive quality, … goaded by a sense of tragedy and shame over the Chinese experience in the last century.” Presumably this refers to China’s bloody civil war (Mao’s Communist Revolution), followed by Mao’s slaughter and execution of tens of millions of people in the Great Leap Forward and the Cultural Revolution.

But now that’s changing, according to Xiao. And of course that makes sense from a generational point of view, since young people today have no personal memories of the horrors of Mao’s genocidal atrocities.

Before continuing with Xiao, it’s worth mentioning that there’s a resurgence of interest in Mao going on, at least to judge from the Chinese community in Toronto. This has really been taking hold in the last few months, as the financial crisis has grown.

Just as anxious people in the United States are looking back at President Franklin Roosevelt as a cure for our problems, anxious Chinese people are looking back at Mao as a cure for their problems.

The claim among these people is that capitalism is now proven to be a failure and that Mao was right all along in embracing Communism. However, this is greater than a condemnation of the West. Much of the pro-Mao criticism is directed at the Chinese Communist Party (CCP) government, for pursuing “reforms” that move toward capitalism away from Communism. These criticisms have been further spurred by numerous stories of corruption and embezzlement in the Beijing government.

Now returning to the interview, Xiao’s discussion of “a sense of tragedy and shame” over Mao’s massive bloody atrocities in the last century is being eclipsed by younger generations who increasingly look to Mao to save them from the current financial crisis.

According to Xiao, there is a new nationalism, and it has the potential to be extremely dangerous:

“Nevertheless, the form of nationalism represented in this book can no longer be defined in these original terms. Overall speaking, the attitude of Western countries toward China is warmer now than it has been in the past, particularly in the midst of the economic crisis, as the West has looked to China . . . hoping for friendly cooperation, and peaceful development has already become a general consensus among nations. Under this situation, the nationalism as represented by Unhappy China, which persists in striking this menacing tone, cannot be characterized as reactive. I believe that for some time to come this nationalist wave as epitomized by Unhappy China will continue to exist, and foreigners will have to learn to come to terms with this non-reactive form of Chinese nationalism.What is the character of this new nationalism? Its crucial point is the positing by necessity of an “external enemy,” and this is seen by the authors as a basic condition of China’s existence and development. One of the authors, Wang Xiaodong holds precisely this. He believes that, “any species, if it is not challenged by its external environment, will certainly degenerate.” He finds a root for this new nationalism in social biology. He believes also that China has at present no “selective pressures,” so “everyone believes that things are fine, and that its OK to muddle along, and this makes degeneration unavoidable.” Particularly interesting is this line: “America too faces this problem, and so it actively goes in search of enemies.” I’m not sure, but it seems Brother Xiaodong is actually suggesting that in order for our people to grow strong, China must, lacking “selective pressures,” go and search for “selective pressures.”

I think the logic here can be summed up like this: If external pressures are the necessary condition of the development and existence of a people, if they then lack pressures, they must as a matter of course manufacture these pressures. If this is the argument, then it is both fearsome and dangerous. I really, really hope this is not what the authors mean, but what of the “angry youth” who are more radical than they are? They can certainly seize upon this logic . . . It is in this theoretical logic of nationalism that I see something frightful and dangerous. It does not lie too far, in fact, from bullying racism and jingoism.”

From the point of view of Generational Dynamics, what’s important about this situation is not that the book was written and published, but that it’s suddenly so popular. This indicates a massive change in attitudes, a generational change by the people of China. And if Xiao is right, then it’s “something frightful and dangerous,” an attitude of “bullying racism and jingoism.”

This could quickly translate into some kind of significant change in Beijing’s policies.

I make a comparison to the February 19 on-air rant by CNBC market reporter Rick Santelli criticizing President Obama’s bailout plan. What was significant about this was not the rant itself — Santelli rants about something almost every day — but that the rant achieved “viral” status and spread around the internet. As I wrote in “The mob turns ugly as AIG bonuses come under fire,” Santelli’s rant signalled a signficant change in public attitudes, and for the first time, the Obama administration was put on the defensive about its entire economic strategy.

Similarly, it’s possible that this rapid acceptance by the public of “racism and jingoism” could force a similarly dramatic change in CCP policies. The CCP is one of the most paranoid governments on earth, especially since the massive anti-government Tiananmen Square student demonstrations in 1989, followed by the collapse of Communism in Russia in 1991. The CCP has no particular objectives except for one — to do anything it can to stay in power. If that means making some policy changes to accommodate the attitudes of the masses reading “Unhappy China,” then they will do that.

I’d now like to address two related questions that I hear frequently from web site readers.

Is the US becoming socialist?

This is a question I hear discussed on television, and from readers. Here’s how one reader put it:

“I know you try to avoid taking political sides, but I have been quite worried about Barack Obama. I will admit that I am a conservative Republican, and thus predisposed to not trust Obama on anything. I also realize that the Republican party has let us down as of late. I do still support President Bush and respect the difficult job that he did during challenging times.I believe that Obama is a Marxist, based on his numerous associations (Bill Ayers, Reverend Wright) and some of his “spread the wealth” comments during the campaign. This is my opinion, which admittedly may come from a general distrust of the Democrat party. My fear is that we will have full-scale bank nationalization and will end up with a truly Socialist government by the time Obama is out of office.

I would appreciate your views on if you think this is a possible scenario. I also realize that a depression may make it necessary to to have more socialistic policies for a time until we have some recovery. Those type of policies are very difficult to reverse once they are put in place, however, it would seem.”

From the point of view of Generational Dynamics, any such massive change in economic policy is possible only if the masses of people believe it. No one that I know believes that the US government is capable of running a bank or an auto manufacturer, and there has been a big backlash recently when the Obama administration fired the CEO of General Motors. On the other hand, the Chinese people apparently DO believe that the CCP is capable of running a bank, so there’s a big difference between the US and China in that regard.

However, there’s another important issue. What exactly is “socialism”? Here’s a dictionary definition: “Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy.”

It’s fairly easy to show, using the mathematics of Complexity Theory, that this system of government is mathematically impossible. For a small population, say a feudal fiefdom with a hundred people, all aspects of the economy could be controlled by a feudal lord. But as the population grows, you need a collection of “regulators,” people who decide things like prices, or who make decisions about what will or will not be produced. It’s easy to show that as the population grows exponentially, the number of “regulators” has to grow at an even faster exponential growth rate. Thus, as the population grows, soon every person has to become a “regulator,” and the system falls apart.

One might wonder what happened in Mao’s Great Leap Forward in 1958-59, something that caused the deaths of tens of millions of Chinese. Here’s a description:

  • 500,000,000 million peasants were taken out of their individual homes and put into communes, creating a massive human work force. The workers were organized along military lines of companies, battalions, and brigades. Each person’s activities were rigidly supervised.
  • The family unit was dismantled. Communes were completely segregated, with children, wives and husbands all living in separate barracks and working in separate battalions. Communal living was emphasized by eating, sleeping, and working in teams. Husbands and wives were allowed to be alone only at certain times of the month and only for brief periods. (This was also a birth control technique.)
  • All workers took part in ideological training sessions, to provide for ideological training of the Chinese masses.

This was the craziest damn thing. Mao tried to implement it because it was the only way to control the economy with a large population. The whole thing was a disaster when tens of millions of people died of starvation.

That’s why, in the decades since then, China has instituted “reforms” that moved the country in the direction of capitalism. That’s why Communism collapsed in the Soviet Union. That’s why North Korea and Cuba, the two remaining Communist countries, have economies that are still stuck in the 1950s.

Thus, socialism and communism are mathematically impossible as a population grows. It’s not possible for any government to control all aspects of the economy. However, a dictatorship can control selected portions of the economy. This is what China is doing, for example. But in this sense, “socialism” and “communism” should not be thought of as economic systems; they’re actually political names for dictatorial forms of government. Thus, from the point of view of Generational Dynamics, “socialism,” “communism” and “fascism” are different names for pretty much the same thing.

So, Dear Reader, for those of you who are worried that President Obama is going to lead the nation into socialism, let me reassure you on two counts: Socialism is politically unacceptable in America, and socialism is mathematically impossible anyway.

China: Civil war or war with US?

I’ve frequently mentioned in the past that China is headed for a civil war, and at other times I’ve mentioned that China is headed for a major war with the US. Several web site readers have asked me about this, since they seem to be conflicting.

Actually, they’re not conflicting at all. The easiest way to see that is to look at World War II. China was in a massive civil war from 1934 to 1949, and right in the middle, China was in a war with Japan. Unfortunately, there’s no law of Nature or Physics that says you can’t be in more than one war at once.

From the point of view of Generational Dynamics, a refighting of the civil war is certain. As I wrote in 2005 in “China approaches Civil War,” China has a long history of massive internal rebellions and civil wars, creating bloodbaths that have slaughtered tens of millions of people in a short period of time. These include the White Lotus rebellion that began in 1795, the Taiping rebellion that began in 1852, and the Communist Revolution that began with Mao Zedong’s genocidal Long March in 1934.

From the point of view of Generational Dynamics, China is now about due for its next massive internal rebellion and civil war, and the current financial crisis is exactly what is needed to trigger a new rebellion.

On the other hand, a refighting of the 1940s war with Japan is also inevitable. As I wrote in 2007 in “Chinese commemorate the 1937 Massacre at Nanking (Nanjing),” feelings still run deep in China about the Nanking massacre, as well as the use of Chinese and Korean women as “comfort women” by the Japanese army.

The Chinese have always been grateful for the help that the Americans gave to defeat the Japanese on Chinese territory. However, by “the Chinese,” I of course mean the survivors of World War II. Those people are almost all gone now. The younger generations feel no such gratitude; they feel only anger at what they feel is humiliation of China by the West and at the financial crisis, which they blame on the US.

The best seller status of “Unhappy China” marks a potential turning point. It’s absolutely certain that the people in the CCP are extremely concerned, and they will do everything they can to defuse the issues. If they succeed at all, it will not be for long.

(Comments: For reader comments, questions and discussion, see the China thread of the Generational Dynamics forum.) (12-Apr-2009)

New Pentagon report shows China continues to prepare for war with US, New terrorist attack in Lahore leads Pakistanis to despair, Fiscal stimulus programs in 1930s and today

Fiscal stimulus programs in 1930s and today
Did Hitler really do everything right?

The US government has spent, lent or committed $12.8 trillion, for bailouts and stimulus spending, according to the latest figures.

It wasn’t that long ago that a billion dollar seemed like a lot of money. But then we had President Bush’s $60 billion stimulus package, followed by various bailouts and fiscal stimulus packages costing almost a trillion dollars each, and a new multi-trillion dollar budget.

Related Articles

Fiscal stimulus

Fiscal stimulus programs in 1930s and today: Did Hitler really do everything right?… (1-Apr-2009)


The effects of massive fiscal stimulus – Part II: President-elect Barack Obama is turning apocalyptic in his speeches…. (12-Jan-2009)


The economic outlook for 2009 : How we got to where we are today, who’s to blame, and where we’re going in 2009. (5-Jan-2009)


The effects of massive fiscal stimulus.: A study comparing Japan’s deflationary spiral with ours shows the way…. (24-Dec-2008)


One, Two, Three … Infinity: Watching the world spin out of control…. (25-Nov-2008)


Are we going in the right direction?

In articles in December and January, “The effects of massive fiscal stimulus,” and “The effects of massive fiscal stimulus – Part II,” I described a presentation that was the first thing I’d heard in years that forced me to reassess my thinking about the country’s continually exponentially escalating public debt. The presentation, by Richard C. Koo, Chief Economist at Nomura Research Institute, drew on the experience of the 1930s Great Depression and the 1990-2005 “lost decade” in Japan to reach the conclusion that these massive spendings programs are exactly the way to go.

Still, Koo’s presentation raised some serious issues and possible flaws in his theory. These issues are highly relevant to the choices being made by Congress and the Obama administration.

Last week, Koo gave a new presentation, addressing today’s news, as well as some of the issues that I raised. I recommend to everyone to listen to and watch both presentations.

In this article, I’m starting with a lengthy summary of the latest presentation. Then I’ll address what are apparently several flaws. And finally, I’ll relate it all to the coming Clash of Civilizations world war.

Presentation summary

Here are the major points that Koo covered in his presentation:

  • We are rapidly entering an era of a “balance sheet recession,” which is quite different from other recessions. In a balance sheet recession, businesses change their objectives from maximizing profits to paying down debt. This has a drastic effect on the economy when everyone does it at once. It happens to a country only after many decades after the last one, and it happens after a huge bubble starts bursting.
  • Koo is particularly qualified to recognize and diagnose balance sheet recessions, because he’s been a central banker and financier in the United States and Japan for several decades, and because he was personally actively involved in dealing with the Latin American balance sheet recessions in the 1980s, and the Japanese balance sheet recession from 1990 to 2005.
  • What’s very depressing today is that it’s not happening in one country — it’s happening in countries everywhere around the world, including the US, Spain, Ireland, China, France and Australia. The one ray of hope is that the world can learn from Japan’s experience.
  • In Japan, commercial real estate led the bubble in the 1980s. By 2005, commercial real estate prices fell 87% from their peak — down to 1973 price levels.
  • In Japan, the GDP never fell below what it was at the peak of the bubble. And overall unemployment rate never went above 5.5%, and wen below afterwards. The Japanese kept paying down debt, even though the Bank of Japan (BOJ) lowered interest rates from 8% to 0% by 1995. In real estate and shares, Japan lost 1500 trillion yen in wealth, the wealth equivalent of 3 years of GDP. The budget deficit from 1990 to 2005 was 300 trillion yen, 60% of Japan’s GDP.”We came out of the mess in 2005. All the debris that had accumulated during the bubble was finally gone. Balance sheets were finally fully repaired in this 15 year period.”

    In Japan, the credit crunch began in 1997. Japan never had a credit crunch, except for 18 months — Oct 1997 to May 1999. Outside of that, banks were eager to lend.

  • American economists bashed Japan ten years ago because the deficit grew and GDP didn’t increase. What they overlook is that without the stimulus, Japan’s GDP would have fallen deeply, instead of staying level. The fact that the GDP never fell below its peak value makes this the most successful fiscal spending policy in the history of mankind.
  • The reason that President Obama is having so much political trouble is because he isn’t being forceful enough in saying that this is a war, and has to be fought as such. Or, “It’s not just a cold. It’s pneumonia.”However, Koo points out that it’s not necessary from the Administration to move as quickly as he seems to want to. All that’s necessary is that the banks have to be able to lend, and the GDP has to remain flat.
  • Japan was a high savings rate country and America has been a debtor nation, but this makes no difference, because all the money needed for the stimulus is generated internally. “The money that the government borrows and spends is the money that is saved within the economy, but not borrowed within the private sector. but not borrowed, so it’s sitting there.”
  • A big problem with the stimulus plan is ratings agencies (Moody’s and S&P), because they downgrade countries with these problems and these deficits. “We wasted some time because ratings agencies lowered Japan’s ratings. We were lower than Botswana in Africa. Rating agencies can really throw a monkey wrench into this corrective process. If ratings screw up the sentiment, we all suffer.”
  • Koo was personally involved in the Latin American banking crisis of 1982, and he told some anecdotes about Paul Volcker, who was Fed Chairman at the time. Volcker called central bankers around the world, asking them to lend money to Latin American banks, and not let them go into default.
  • In response to an audience question about the TARP, Koo said he’s very worried about what the Fed is doing, because putting the toxic assets on the balance sheet of the Fed is going to risk losing trust in the currence. The toxic assets should be on the balance sheet of the Treasury, not the Fed. “The way that Bernanke bashed Japan ten years ago makes a lot of people worry that he’s going to go all out. People will get really scared about the dollar currency.”
  • Koo was asked whether other countries have to do the same thing for this to work. He said that there’s a real danger here. Everyone should create enough fiscal stimulus to keep their GDP from falling, just as Japan did. It’s very bad if some countries do nothing, expecting other countries to bail them out. He worries especially about Europe, because the Maastricht treaty is so binding. Fiscal stimulus in Europe is limited to 3% of GDP, which is nowhere near enough.
  • Koo was asked how long this will take to work out, if it took 15 years for Japan. He said it would take 3-5 years, “but I’m just guessing, because we haven’t seen the bottom of the asset prices yet.”
  • Japanese had export markets to rely on. Even though people make a big deal about export markets, export markets did not add or subtract to Japanese economy throughout this period. [This appears to be a major hole in Koo’s theory, as I’ll discuss below.]Japan’s trade surplus was remarkably stable throughout the period. So Japan handled its problems within its borders. All countries should handle their problems within their borders, so that the problems won’t spill out to other countries. So countries have to do more than Japan did, and that’s what they face at the moment.
  • Audience question: Where would the stimulus money best be spent? Answer: Historically, the best way is military spending, because it creates demand, without creating supply. That’s why economies recover quickly. But if you increase both demand and supply, then they start chasing each other. If you want the smallest budget deficit, and largest bang for money, that’s the best way. Koo said he’s not here to advocate military spending. “There are lots of roads and bridges here needing repair.”
  • Question: What is the impact on the global political situation?Answer: “We are going to see some democracies fail, some governments fail, because some countries are unprepared to deal with it.

    Nothing is worse than having dictatorships with the wrong agenda, using the right economic policy. That’s what happened in the 1930s. Hitler got everything right, handling this type of recession. That’s why German unemployment German unemployment was 30% in 1933, and was brought down to 2% very shortly.

    In US, unemployment was at 25%, and it went down dramatically with FDR’s policies, but went back up in 1937 when stimulus was cut. The policies were working, but were interrupted.

    So there are huge political implications to this crisis, and I’d like to see democratic governments follow this policy before the dictators do.”

I’ll now turn to some major issues and possible flaws in Koo’s theory. I’ve discussed these issues before. In this presentation, Koo addressed some of these issues, but did not give satisfactory answers, in my opinion.

The timing problem

This is the biggest flaw in Koo’s presentation and in the Obama administration’s plans.

The stimulus programs that have worked in the past have all required a five-year delay before they even began to be effective.

President Herbert Hoover’s administration tried various spending programs in the early 1930s, but they were ineffective. It wasn’t until 1935 or so that President Franklin Roosevelt’s spending programs began to be effective. A similar statement can be said of Japan in the early 1990s.

According to Koo, a balance sheet recession begins when a huge asset bubble bursts. As with an ordinary balloon, when it starts leaking it leaks very quickly at first. After a time, it’s almost completely deflated, and the leaking occurs more slowly.

In other words, a deflationary spiral is very rapid at first.

According to the Bank of International Settlements, there are over $1 quadrillion ($1,000 trillion) worth (notional value) of credit derivatives and other structured finance securities in the portfolios of financial institutions around the world. That represents a good part of the credit bubble. That bubble is leaking at perhaps a trillion dollars or so per month. The leaking is very rapid right now, and no stimulus program can keep up.

That’s why the bill is already up to $12.8 trillion, and growing. No amount of bailouts and stimulus can keep up with the leaking, at least not at this time.

Koo’s 3-5 year estimate for the crisis to end is simply wishful thinking. It took 15 years for Japan’s crisis to end, and there’s no reason why it should take the US any less time, especially since it took almost 15 years for the dot-com, real estate, credit and stock market bubbles to expand.

Tax cuts versus spending

Koo’s attitude towards tax cuts doesn’t make sense. His point is that if you lose stimulus money for tax cuts, then the businesses simply use the money to pay down debt, so you only get 1 to 1 leverage for that money. But if you use the money for government spending projects, then the money creates jobs, and in a domino effect, that money creates 8 to 1 leverage.

But he overlooks the fact that lowering business taxes will allow businesses to save jobs, and will allow some businesses to survive, where they might go out of business without the tax cut. If a business lays people off or closes completely, then there’s a reverse leverage effect, possibly 8 to 1. So carefully targeted tax cuts are just as important as carefully targeted spending programs.

If a tax cut can save 5 million jobs, that’s better than spending stimulus money on 3 million make-work jobs.

What I proposed last month was that stimulus spending be split into two phases: First, a Preservation Phase, where the focus is on preserving existing jobs and businesses, and then, after five years, a Recovery Phase, where spending is targeted at new jobs.

The Administration seems to understand the “Preservation Phase” concept when it comes to the automobile industry (which is unionized), but they seem unwilling to do anything to help other businesses survive.

Japan’s export economy

Another big flaw is Koo’s theory is his response to the issue of export markets. During Japan’s balance sheet recession, the rest of the world was in a credit bubble, and Japan could export trillions of dollars worth of goods to other countries, in exchange for currency. Koo claims that exports had no effect, since Japan’s trade surplus was “remarkably stable” throughout the entire period, 1990-2005.

But that’s not the point. Suppose those export markets hadn’t existed? Then Japan’s trade surplus would have gone sharply negative, and Japan’s GDP would have fallen sharply, instead of staying flat.

The issue is what I call “leakage,” and I can’t figure out whether Koo doesn’t understand this (unlikely) or is lying about this issue.

This intersects with the issue of protectionism, a subject that Koo never mentioned. In order to prevent leakage, a country can insist that all stimulus funds be spent internally — which the US has done with its “Buy American” clause in the stimulus plan. Protectionism invites retaliation, and ALL countries’ GDPs go down, as happened in the 1930s.

In order for the stimulus money to come back to the Treasury, it has to be used internally within the country. If the money is used for foreign goods and services, then it “leaks” out of the system. The only way to compensate is to get the money back through exports, and Japan had plenty of export opportunities available.

As if proof were needed, the latest economic figures from Japan are devastating: Japan’s exports plunged a record 49.4% in February, and the economy shrank at an annual 10.9% last quarter.

And as I’m typing this, a new Tankan survey of manufacturing confidence has fallen to the lowest level since the survey began in 1974.

It’s really pretty clear what happened to Japan. The stimulus programs didn’t really help much at all. Instead, the economy shifted to where the money was — exporting to China and the US. Now those export markets have virtually disappeared, and Japan is going to be suffering along with everyone else.

It’s also pretty clear that President Roosevelt’s spending programs really didn’t help much in the 1930s. What ended the Great Depression for America was World War II.

And that brings us to the most important subject of all.

Hitler and today’s dictatorships

Koo’s most dramatic remarks came at the very end. FDR’s spending programs didn’t end the 1930s Depression. World War II did. Spending on the military, according to Koo, gives the highest “bang for the buck.”

Koo said Hitler did everything right — spending massively on the military. (He would be forgiven for not mentioning that probably the Japanese did everything right as well.) He expressed the hope that this worldwide financial crisis would not allow dictatorships to get ahead of democracies.

What dictatorships is he talking about? Well, maybe Russia, but you can be sure that he’s thinking of China.

A few days ago, in “New Pentagon report shows China continues to prepare for war with US,” I discussed the rapid military buildup that China is pursuing.

China is now embarking on a very aggressive fiscal stimulus plan. China doesn’t say how much of the stimulus is going into the military. But China has already been increasing the military by 10-20% a year for years, as they prepare for war with the United States. I think it’s quite certain that China will take advantage of this fiscal stimulus program to further increase military spending.

In the US, by contrast, President Obama is planning to cut weapons systems. As the world becomes increasingly dangerous, the US is becoming weaker.

I don’t know whether Koo intended this when he made those final remarks about Hitler, but he illuminated a fast-approaching world in which the US and the world’s democracies will be stumbling forward with social programs and bridges to nowhere, while China is turning into a high-powered military machine, preparing for war.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (1-Apr-2009) Permanent Link

New terrorist attack in Lahore leads Pakistanis to despair
An 8-hour attack on a residential barracks for police trainees on Monday ended with 10 dead and over 100 wounded.


India and Pakistan
India and Pakistan

Here’s a summary of how it happened:

“The attackers arrived at the police academy apparently in pick-up vans at about 7:15am. Some of them were wearing police uniforms. They entered the sprawling compound by scaling the rear boundary wall. More than 800 unarmed trainees were in the grounds for the morning parade. The attackers threw grenades at the trainees and began to fire indiscriminately. Police were not able to put up a significant resistance. Some of the gunmen took up positions on the first and second floor of the three-storey residential barracks. A coherent response to the attack began about 30 minutes later, when Elite Force commandos surrounded the building. Rangers and army troops arrived at 9am and stormed the premises in armoured vehicles. Four helicopters hovered overhead. The troops were able to free the hostages and regain control of the facility after an eight-hour standoff. Three attackers blew themselves up to avoid capture in the top-storey room in which they had holed up. An Afghan attacker was arrested from outside the premises during the operation.”

It was just three weeks ago when the entire nation was shocked by a terrorist attack on Sri Lanka’s cricket team, as they were headed to the stadium in Lahore.

There are now several terrorist attacks every week in Pakistan, mostly in the Northwest Frontier Province and the tribal regions. But the two attacks in the supposedly safe city of Lahore, within the same month, has revealed to many Pakistanis that terrorism is spreading rapidly throughout the country.

Here’s a list of the major earlier Pakistan terrorist attacks in the last year:

  • 27 March 09: Suicide bomber demolishes crowded mosque near the north-western town of Jamrud, killing dozens
  • 3 March 09: Six policemen and a driver killed, and several cricketers injured, in ambush on the Sri Lanka cricket team in central Lahore
  • 20 Sept 08: 54 die in an attack on the Marriott hotel in Islamabad
  • 6 Sept 08: Suicide car bombing kills 35 and wounds 80 at a police checkpoint in Peshawar
  • Aug 08: Twin suicide bombings at gates of a weapons factory in town of Wah leave 67 dead
  • March 08: Suicide bombs hit police headquarters and suburban house in Lahore, killing 24

With the fear of terrorism spreading, Interior Minister Rehman Malik urged the country to unite against Taliban extremists. He said Pakistan’s integrity was “in danger at this time”.

“This is not a law and order issue. This is an attack on Pakistan. We have two choices: hand the country over to the Taliban or fight it out,” said Malik.

However, many people support the militants for nationalistic reasons. The militants lead the fight for capturing control of Indian-controlled Kashmir from India. And many young people especially blame the Pakistani terrorism on the United States for inflaming the militants by fighting the war on terror in Afghanistan.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Afghanistan, Pakistan and India thread of the Generational Dynamics forum.) (31-Mar-2009) Permanent Link

New Pentagon report shows China continues to prepare for war with US
Rapid military buildup focuses on Taiwan, submarines, and anti-satellite weaponry.

If you listen to the words of the People’s Republic of China (PRC), then you can believe that we’re headed for a “harmonious world,” where all countries experience the joys of “diversity” and “equality” in international relations. These claims reflect the guidance of Deng Xiaoping in the early 1990s: “observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”

If you look at China’s actions, you can see a country preparing for all-out war with the United States. These actions are documented in the Department of Defense’s annual report to Congress, “Military Power of the People’s Republic of China.” In fact, China gone much farther than it had at the time that last year’s report was published.

China has been focusing on “asymmetric warfare” techniques designed to strike at weak points in America’s military, and overcome America’s military superiority. These include heavy investment in ballistic and cruise missile systems; undersea warfare systems, including submarines and advanced naval mines; counterspace systems; computer network operations; special operations forces; and the “Three Warfares” concept.

Three Warfares

The “Three Warfares” doctrine is extremely interesting. It’s an information warfare concept aimed at influencing the psychological dimensions of military activity:

  • Psychological Warfare: seeks to undermine an enemy’s ability to conduct combat operations through psychological operations aimed at deterring, shocking, and demoralizing enemy military personnel and supporting civilian populations.
  • Media Warfare: is aimed at influencing domestic and international public opinion to build public and international support for China’s military actions and to dissuade an adversary from pursuing policies perceived to be adverse to China’s interests.
  • Legal Warfare: uses international and domestic laws to gain international support and manage possible political repercussions of China’s military actions.

From the point of view of Generational Dynamics, the “Three Warfares” doctrine is extremely ominous, because it comes from a complete misreading of generational eras.

This kind of “psychological warfare” works very well during a generational Unraveling era, such as the 1990s or early 2000s. During these times, while many leaders are still from the generations that survived the previous crisis war (like the Silent Generation that survived WW II), there is an aversion to war that makes psychological warfare very effective.

But during a generational Crisis era, when the leaders (like the Boomers) are in the generations born after the last crisis war, then this psychological warfare backfires, and causes the enemy to panic and overreact.

That’s why this doctrine is so ominous. It’s self-delusional for the Chinese. It leads them to delude themselves into believing that they can attack Taiwan and the US won’t retaliate, provided that they put out the right press release to the newspapers.

In other words, this kind of psychological warfare may have been effective when Bill Clinton was President, and perhaps even when George Bush was President, but it will backfire under President Obama, who will be forced by the young public to overreact, and that in turn would cause the Chinese to overreact.

This back and forth overreaction leads to what is called the “regeneracy” in generational theory. The regeneracy occurs when the public is so shocked that political bickering ends, and civic unity is “regenerated” for the first time since the end of the preceding crisis war. When each side’s public is united against the other side, a crisis war is triggered.

(For information about the term “regeneracy” and about generational eras, see “Basics of Generational Dynamics.”)

But China isn’t depending just on psychological warfare. China has been pursuing a massive military buildup for years, as shown by the following graph from the report:


China: Military budget vs GDP growth, 1997-2008 <font face=Arial size=-2>(Source: Pentagon)</font>
China: Military budget vs GDP growth, 1997-2008 (Source: Pentagon)

Worldwide financial crisis

The more interesting question is how all this will be affected by the worldwide financial crisis.

World leaders in countries around the world are implementing massive stimulus packages to put people to work in things like infrastructure development.

As we’ll discuss further in an article to be posted in a day or two, the most effective form of stimulus spending is military spending. During the 1930s, Hitler was much more effective than President Roosevelt. Both countries were devastated by the Great Depression, but Hitler focused Germany’s stimulus spending on weapons development, while President Roosevelt did not. This gave Germany an enormous head start in WW II.

China is now embarking on a very aggressive fiscal stimulus plan. China doesn’t say how much of the stimulus is going into the military. But China has already been increasing the military by 10-20% a year for years, as they prepare for war with the United States. I think it’s quite certain that China will take advantage of this fiscal stimulus program to further increase military spending, possibly substantially.

In the US, by contrast, President Obama is planning to cut weapons systems, in order to pay for the social programs in his fiscal stimulus budget. As the world becomes increasingly dangerous, we’re repeating the mistakes of the 1930s.

There is absolutely no guarantee that the USA will do well in the coming world war. Even if the USA “wins” the war, China has promised to blanket America’s cities with nuclear missiles. And it’s possible that the USA might very well lose the war. One scenario: After a major nuclear war, the Chinese will still have around a billion people. If they’ve successfully destroyed our defense infrastructure, they could send tens of millions of Chinese to take control of North America. This is all speculation, of course, but the fiscal stimulus plans coming out of the current worldwide financial crisis provides some scenarios that make it a real possibility.

The ‘War Scenario Test’

I’m considering this as an addition to Generational Dynamics theory, and something with great practical significance.

As I’ve said many times, Generational Dynamics tells you what your final destination is, with absolute certainty, but not the path that will take you there or the time frame. The Generational Dynamics forecasting methodology that’s been developed over the last seven years has developed a number of tools for narrowing the time window to obtain predictions that are not absolutely certain, but which have probabilities in the range of 80-90%.

Generational Dynamics tells us that we’re headed for a “Clash of Civilizations world war,” but the question always is, who will be fighting whom? Who will be the new “Allies,” and who will be the new “Axis”?

I’ve commented several times in the past that, based on current trends, we can expect the following: China will be aligned with Pakistan and Sunni Muslims against India; Russia will be aligned with India and Shia Muslims; and India will be aligned with Britain and the west. Japan will be aligned with the West against China.

The “War Scenario Test” that I’m proposing will provide an additional analytical tool for making such forecasts.

Here’s the test: For any given country, is there any realistic scenario that would propel the US immediately into a war with that country?

For China, the answer’s obvious: China is spending massively on military spending to recover Taiwan, and a Chinese attack on Taiwan would bring us to war within just a few hours.

For North Korea, any move by their army across the border towards Seoul would require us to retaliate immediately.

What about Russia? I can’t think of any realistic scenario that would bring us to war with Russia. In fact, last year’s war in Georgia almost proves it — there was never any consideration whatsoever that we would go to war with Russia over Georgia the way we would go to war with China over Taiwan.

India is the same – no chance of war. But Pakistan? There are two realistic possible war scenarios. One is that a war with India would bring us in on the side of India. Another is if Islamist extremists gain control of Pakistan’s nuclear arsenal.

Iran is an interesting case. As I’ve written many times, Iran is a schizophrenic nation, with people who are pro-American, and a government that’s anti-American. There is a possible war scenario — if Iran develops a nuclear weapon, and either the EU, Israel or the US decide that their nuclear capability must be destroyed. But that’s far in the future, and my expectation is that in the meantime the pro-West attitudes of the people will diffuse Iran’s nuclear threat against the West.

So the idea is that if you can think of realistic war scenario, then we’re likely to be enemies in the Clash of Civilizations world war. It makes sense, because if such a scenario CAN occur, then sooner or later it probably WILL occur.

The “War Scenario Test” is an analytical tool, and like all tools, it has to be used carefully and appropriately. When used this way, it provides us additional views of the future that we’ll all share.

(Comments: For reader comments, questions and discussion, see the China thread of the Generational Dynamics forum.) (29-Mar-2009)