“Shadow inventory” of unsold homes continues to grow

“Shadow inventory” of unsold homes continues to grow

Housing prices still have very far to fall. (21-Dec-2009)
Summary A ‘shadow inventory’ of homes, consisting of homes that are at or near foreclosure but have yet been put on the market, has been growing. These will lead to substantial further reduction in housing prices, possibly in the context of an episode of panic selling.
Recent Pollyannish news stories and news anchors have tried to paint a picture that housing prices have bottomed, and that the housing crisis is pretty much over. People should be wary of such claims, however, since the same people have been saying that housing prices have bottomed almost every month since the financial crisis began in 2007.

Contents – This page
A template for China / U.S. relations
Delaying tactics
Falling housing prices

A new study (PDF) by First American CoreLogic indicates that there’s a substantial and growing “shadow inventory” of residential housing.

These 1.7 million homes are not yet on the market, but are headed there soon. They include the following:

  • Pending REO Inventory. REO stands for “real estate owned,” and it refers to homes that have been foreclosed, and are owned by banks or other financial institutions.
  • Pending Foreclosure Inventory. These are homes where the homeowners have already received foreclosure notices, but the final foreclosures and evictions have not yet taken place.
  • Pending Serious Delinquency Inventory. These are homes where mortgage payments have fallen behind, and the homeowner is at least 90 days delinquent.

The following graphs show the growing size of this shadow inventory:


Housing: Shadow inventory <font size=-2>(Source: First American CoreLogic)</font>
Housing: Shadow inventory (Source: First American CoreLogic)

What’s interesting about the above graph is that the “Serious Delinquency” category appears to be growing fastest of all. There are good reasons for this.

Delaying tactics

First, banks and major lenders have been granting moratoriums on foreclosures, allowing people to stay in their homes well past the normal time a foreclosure would have occurred.

Second, there have government programs designed to reduce the housing inventory. One of these is the Federal Housing Tax Credit, which has been extended into mid-2010. It grants an $8,000 tax credit to home buyers.

Another is the Home Affordable Modification Program (HAMP), which provides cash incentives to the bank or lender to modify the homeowner’s mortgage to make it more affordable, so that foreclosure can be avoided.

Actually HAMP has not done anything to reduce the shadow housing inventory, because HAMP has been pretty much a failure, at least so far.

As of October, more than 650,994 loan revisions had been started through HAMP, but not a single one had been converted to a permanent repayment plan. This result caught the attention of the Treasury Dept., and they began to pressure banks to make the loan revisions permanent. However, according to a government press release, only 31,382 revisions have been made permanent, out of 728,000 that had been started as of the end of November.

Those factors explain why the “Pending Foreclosure Inventory” has been growing so dramatically. As this inventory grows larger and larger, the probability of a full-scale housing panic begins to grow.

Banks and lending institutions are aware of this danger, and that’s why they’ve adopted foreclosure moratoriums and other procedures to keep the shadow inventory off the market. But history shows that such techniques can only delay a panic. Once it becomes clear to everyone that prices are falling, then everyone throws houses in the market to get rid of them as quickly as possible, before prices fall even further.

Falling housing prices

How far will housing prices fall? Mortgage broker Michael David White has done a historical analysis that provides an answer to that question:


Historical housing price trend <font size=-2>(Source: NewObservations.net)</font>
Historical housing price trend (Source: NewObservations.net)

According to White’s analysis, housing prices are still far above the historical trend line, even though they’ve already fallen 6%. To reach the trend line, prices have to fall three times as much as they have already.

This is a clear indication that a housing panic will be coming soon.

But actually, it’s much worse than that.

I frequently mention the Law of Mean Reversion on this web site, in discussing stock prices. Simply speaking, it says this: Stock prices have been overpriced by a factor of 150% to 250% for almost 15 years — since 1995; therefore, the stock prices will have to fall sharply, to the Dow 1500-2000 range, and stay well below the trend value for the next 15 years. I didn’t invent the Law of Mean Reversion; I’m only telling you what it says. (See “How to compute the ‘real value’ of the stock market.”)

The same law applies to housing prices. White’s analysis says that housing prices have to fall three times as much as they have to return to the value indicated by the trend line. That’s true, but by the Law of Mean Reversion, housing prices have to fall much farther than that. Roughly speaking, they have to fall as far below the trend line as they went above the trend line in the real estate bubble.

If you examine White’s graph, you can estimate that housing prices have to fall to roughly 1990 levels.

As a practical matter, this means that if you decide to buy a house (definitely a bad idea in this market), then you shouldn’t pay any more for the house than the market price that the house had in 1990.

Contents – This page
A template for China / U.S. relations
Delaying tactics
Falling housing prices

The growing size of the shadow inventory indicates how this will happen. As the shadow inventory continues to grow, at some point, someone will say or do something that triggers a panic. This will cause prices to fall very quickly to 1990 levels.

(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.)

More from Generationaldynamics.com- Europe celebrates the fall of the Berlin Wall on November 9, 1989 and Theological split in Iran widens as opposition protests continue

Europe celebrates the fall of the Berlin Wall on November 9, 1989
If East and West Germany were reunited, then why not North and South Korea?

On the 20th anniversary of the fall of the Berlin Wall, all of Europe was celebrating. The following short video, Domino Effect:The Berlin Wall Falls Down Again, shows some of the more spectacular events in the celebration:

 

I was as shocked and surprised as anyone when the Berlin Wall fell in 1989. I never dreamed that I would see it fall in my lifetime.

When World War II ended in 1945, much of the world was furious at the Germans. They blamed Nazi Germany for World War II, and they incorrectly also blamed Germany for World War I.

The WW II victors decided to partition Germany, to make sure that they wouldn’t start WW III. According to the 1945 Potsdam Agreement, Germany was partitioned into four regions, one to be administered and occupied by each of four countries — the Soviet Union, the UK, France, and the U.S. The last three of these regions were quickly merged into West Germany, while the Soviets retained control of what became East Germany.

The Soviets didn’t stop there. They took control of all of Eastern Europe — East Germany, Bulgaria, Poland, Hungary, Czechoslovakia, Romania and Albania. These became known as “Iron Curtain countries” after Winston Churchill’s famous 1946 Iron Curtain speech:

 

“From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject in one form or another, not only to Soviet influence but to a very high and, in some cases, increasing measure of control from Moscow. Athens alone — Greece with its immortal glories — is free to decide its future at an election under British, American and French observation. The Russian-dominated Polish Government has been encouraged to make enormous and wrongful inroads upon Germany, and mass expulsions of millions of Germans on a scale grievous and undreamed-of are now taking place. The Communist parties, which were very small in all these Eastern States of Europe, have been raised to pre-eminence and power far beyond their numbers and are seeking everywhere to obtain totalitarian control. Police governments are prevailing in nearly every case, and so far, except in Czechoslovakia, there is no true democracy.”

Soviet authorities built border fences separating east and west Europe, and border guards shot and killed anyone who tried to escape to the west.

But there was one gaping hole in the Iron Curtain — the city of Berlin. Berlin was physically located inside of East Germany, but according to the Potsdam Agreement, Berlin itself was partitioned, with East Berlin controlled by the Soviets, and West Berlin still part of West Germany. This was never a comfortable situation, as the Soviets in 1948 tried to blockade West Berlin, and prevent supplies from reaching the city. President Harry Truman ordered the Berlin Airlift to supply tons of food and other supplies.

Throughout the 1950s, the vast differences between east and west became apparent to the world. People living in western European countries, such as UK, France and West Germany, enjoyed democracy and thriving economies. But people in Iron Curtain countries were oppressed and tortured for political crimes, and they lived in poverty. News stories coming out of eastern Europe told of the indignities and hardship of daily life, such as having to wait in a queue for hours just to buy a roll of toilet paper.

Millions of people who were trapped in the east would escape by making their way to East Berlin and crossing over to West Berlin and to freedom. Finally, the Soviets could stand it no more. On August 12, 1961, the East German army began tearing up streets that connected East and West Berlin, and installed a barbed wire barrier encircling all of West Berlin, guarded by troops ordered to shoot to kill anyone who tried to defect. Thus, the border was closed within 24 hours. After that, the East Germans replaced the barbed wired with 12 foot high concrete barriers, guarded by watch towers.

The Berlin Wall split friends, families and lovers for decades. People who were trapped in the East could no longer travel to the West, and people in the West didn’t want to go East, for fear of being trapped there. Thousands of East Germans tried to escape by climbing over the wall, and hundreds were killed by East German border guards.

By the 1980s, the Berlin Wall was becoming intolerable to the Germans themselves. Germany entered a generational Unraveling era and, as indicated by the name, all the austere measures that were imposed after WW II to prevent a new war began to unravel. A triggering event may have been President Ronald Reagan’s 1987 speech in Berlin, in which he said, “Mr. Gorbachev, open this gate. Mr. Gorbachev, tear down this wall!”

During the next few years, an incredible domino effect occurred. First, Hungary opened its border with Austria, permitting East Europeans to escape to the West via that route. Mass demonstrations began in East Germany, and continued for weeks. On November 9, a televised news program mistakenly reported that the Berlin borders would be opened immediately. Huge crowds of East Germaners mobbed the border gates, and border guards were faced with the choice of shooting into the crowd or opening the gates. Fortunately, they chose the latter.

Germany was reunited within a few months after the fall of the Berlin Wall. There was still fear among WW II survivors over the reunification of Germany — fear that a reunited Germany would once again become a military threat to Europe. I recall seeing Henry Kissinger on television saying something like, “I will have no trouble dying happily if Germany is never reunited in my lifetime.”

Recent news reports indicate that British Prime Minister Margaret Thatcher and French President Francois Mitterand feared that a united Germany would a “unstoppable force” in an unbalanced Europe.

Very quickly, Communism collapsed in other East European countries, and within a couple of years, the Soviet Union collapsed. Johnny Carson joked that America was the only country that still had a Communist Party.

That was a great joke, but of course there are still two Communist countries remaining — North Korea and Cuba. Why can’t North and South Korea be reunited as Germany was, and why can’t Communism in Cuba end, as it did in East Germany?

Generational Dynamics provides some answers.

Generational Dynamics views civil wars very differently from external wars. A civil war pits neighbor against neighbor, brother against brother, husband against wife. If a country fights an external war then, win or lose, the country can celebrate or mourn and then move on. But a country can never celebrate a civil war, and may need a century or more to really move on.

East Germany became partitioned from West Germany by a political decision, not by a civil war. By the time the generational Unraveling era had arrived, there had been two generations of young people who had no personal memory of WW II and didn’t fear a reunited Germany, so the political decision was reversed.

But the partitioning of Korea was no simple political decision. It was a bitter civil war between two groups of Koreans. It’s not a surprise that reunification is difficult or impossible — without another war.

Cuba is a different story. Cuba also had a civil war — Fidel Castro’s Cuban Revolution that climaxed in 1959. Cuba today is in the middle of a generational Unraveling era, and when Fidel Castro stepped down, replaced by his brother Raoul, there were some signs that the Communist economy was beginning to unravel.

The fall of the Berlin Wall ended the story of East Germany, but the stories of North Korea and Cuba are still being told.

Update: I left China out of this discussion because I didn’t want to lengthen the article, but a web site reader said I should have included it. Briefly, China also had a major civil war, Mao Zedong’s Communist Revolution, climaxing in 1949. However, China is different from the others. It’s nominally a Communist country today, having a repressive government that jails, tortures and executes political dissidents. But China has given up control of many parts of the economy, so China today would more accurately be called a Fascist country, rather than a Communist country. (Paragraphs added, Nov 11)

(Comments: For reader comments, questions and discussion, see the Europe thread of the Generational Dynamics forum.) (11-Nov-2009) Permanent Link

Theological split in Iran widens as opposition protests continue
The Islamic Republic of Iran versus the Persian Republic of Iran.

I’ve written several times about the belief of Iranian President Mahmoud Ahmadinejad in the Mahdaviat — the Shia Muslim belief that the Mahdi (or “the 13’th Imam” or “the Hidden Imam”) is coming to save mankind. See, for example, “Iran and Ahmadinejad are waiting for the Mahdi” This belief is roughly equivalent to the Christian belief in the second coming of Christ. (There’s also a Buddhist belief in the Maitreya — that a new Buddha is to appear on earth, and will achieve complete enlightenment.)

In that article, I quoted a couple of paragraphs from his speech to the U.N. General Assembly on Sept. 17, 2005:

 

“From the beginning of time, humanity has longed for the day when justice, peace, equality and compassion envelop the world. All of us can contribute to the establishment of such a world. When that day comes, the ultimate promise of all Divine religions will be fulfilled with the emergence of a perfect human being who is heir to all prophets and pious men. He will lead the world to justice and absolute peace.O mighty Lord, I pray to you to hasten the emergence of your last repository, the promised one, that perfect and pure human being, the one that will fill this world with justice and peace.”

Now, a new BBC documentary by Edward Stourton sheds new light on the depth of this belief, and the way that it’s affecting Iranian foreign policy.

According to Stourton, Ahmadinejad, Supreme Leader Ayatollah Ali Khamenei, and top level government officials are members of a narrow Shia Muslim sect called the “Hasteners” — people who believe that the return of the Imam is imminent, and that it is the duty of the faithful to take whatever steps they can to hasten the return.

It’s as if President Obama, or some other Christian political leader, belonged to a sect that advocated starting a nuclear war in order to hasten the second coming of Christ.

Thus, Shia Islam has two conflicting doctrines that guide the faithful in their lives. One doctrine, known as Intizar (patient waiting) maintains that the best that believers can do is to be patient and wait until the Imam decides to return. That doctrine is opposed by another known as Ta’ajil (to hasten). The Ta’ajilis (hasteners) insist that believers should seek to unite the entire Islamic community and lead it into battle against the “Infidel” with the view of provoking a final showdown for global domination, to hasten the return of the Mahdi.

Thus, Ahmadinejad is quoted as saying, “Do you know why we wish to have chaos at any price? Because after the chaos, we shall see the greatness of Allah.”

And so we have Ahmadinejad doing things like talking about pushing Israel into the sea or pursuing policies that would allow Iran to develop nuclear weapons. The implication is that Ahmadinejad is pursuing these policies in order to provoke world chaos (presumably, chaos in the form of war) in order to hasten the return of the Mahdi.

Stourton quotes Mehdi Khalaji, a Shia theologian who studied in Qom and a senior fellow of the Washington Institute:

 

“We call apocalyptics people who believe in the imminent return of Hidden Imam and people who believe that worshippers have some duties more than prayer in order to prepare the ground for the return of Hidden Imam. Apocalyptics, they’ve been always in margin of the religious community and also political structure of the country. But with Ahmadinejad, this is the first time that they take over the political power. … [this apocalyptic trend] is frightening, and it is not only frightening for the international community….”

Of course, not everyone agrees with that explanation of Ahmadinejad’s policies. Stourton quotes Professor Ali Ansari, director of the Institute for Iranian Studies at the University of St Andrews:

 

“Ahmadinejad and the others, yes, they do believe that the hidden imam will arrive when the world has reached the most disastrous situation. Whether they feel they have to help that along is a different matter. I think that’s where you’ve got to be a little bit careful. I haven’t seen anything which suggests that. I mean he hasn’t said anything specific. That’s not to say that he might not at some stage. It’s perhaps a question of semantics and a question of being quite pedantic about it but it’s important because people do then extrapolate from things that he has not said yet – whole policy decisions, which I think are unhelpful.”

And so the question is whether the religious beliefs of Ahmadinejad, Khamenei, and other senior leaders of Iran’s government are pursuing a policy of provoking war BECAUSE OF their religious beliefs.

Religion doesn’t cause war; war causes religion

From the point of view of Generational Dynamics, the view that Ahmadinejad decided at one point, perhaps in his childhood, to join a sect called the “Hasteners,” and then later was guided by those religious beliefs to become a politician with the job of provoking world war — that view makes no sense all. What makes much more sense is the view that Ahmadinejad and Khamenei have adopted a certain set of policies designed to keep themselves in power, and that they’ve adopted a version of the “Hastener” religious doctrine to justify those policies.

I discussed the role of religion in Generational Dynamics at length in 2007 in “Book review review: Christopher Hitchens: ‘God Is Not Great: How Religion Poisons Everything.'”

In the past few years, Christopher Hitchens has made a career of claiming that religion is the cause of all wars, with the bizarre implication that if we could only get rid of all religions, then we could get rid of all wars.

From the point of view of Generational Dynamics, the opposite is true. Wars have a political component as well as a military component, and the political component requires the political leaders to justify the moral superiority that’s required to kill other people. There are many possible ways to do that, but the easiest vehicle is religion. Thus, Osama bin Laden may be attacking Western interests because he hates his father, but he justifies his terrorism by talking about infidels and 72 virgins.

What we’re seeing in Iran right now appears to be an archetypical example of how war causes religion.

I’ve written many articles on this web site describing how Iran’s strategy evolved, and it has nothing to do with religion. The Islamic Revolution of 1979 was a massive civil war that brought into power a new group of politicians who justified their victory in religious terms. They achieved this victory by blaming all their problems on outsiders — America, Britain, Israel, and later Iraq. They took over the American embassy in Tehran, and held 52 American hostages for 444 days.

They described Iran as an innocent victim of outside exploiters and invaders, and in doing so, they unified the entire country behind their Revolution.

Now, they’re trying to repeat that strategy, by attempting to blame America, Britain and Israel as interfering, or threatening to attack, the same innocent victim, Iran. But that strategy worked in 1979 because Iran was in a generational Crisis era; today, Iran is in a generational Awakening era, when that kind of strategy cannot possibly succeed.

(For information about generational eras, see “Basics of Generational Dynamics.” For information about America’s Awakening era in the 1960s, see “Boomers commemorate the 40th anniversary of the Summer of Love.” For an extensive analysis of Iran’s strategy, see “China ‘betrays’ Iran, as internal problems in both countries mount.”)

When the big street protests began in Tehran after the June 12 presidential elections, every mainstream analyst that I’m aware of, including the BBC and Stratfor, predicted that the government would crush the protests and that they would end quickly, as happened in the 1989 Tiananmen Square massacre in China. I wrote that, from the point of view of Generational Dynamics, Tiananmen Square is the wrong historical analogy; the best analogy is America’s Summer of Love in 1967, which led to almost a decade of political conflict, and failed presidencies of Lyndon Johnson and Richard Nixon.

In fact, the street protests are continuing and growing, especially since colleges opened in the fall.

Last week, Iran celebrated the 30th anniversary of the takeover of the American embassy in Tehran, on November 4, 1979. The government scheduled large pro-government demonstrations, but they were met with large anti-government counter-demonstrations.

What is becoming increasingly clear is that the student protests are gaining in strength and are presenting a fundamental threat to the Ahmadinejad / Khamenei government, just as America’s 1960s protests threatened the Johnson and Nixon administrations.

If Ahmadinejad and Khamenei succeed in politically surviving the protestors, then the “Hastener” sect will be given a huge boost. From the point of view of Generational Dynamics, that would be a typical example of how a new religious sect gains traction. On the other hand, if they fail, and they’re forced to step down, then the “Hastener” sect will also suffer a major setback, and that would be an example of how a religious sect can fizzle.

An Islamic Republic or a Persian Republic?

Iran is going through a generational Awakening era, and really it’s quite typical of such eras. There is massive political chaos, with occasional violence that fizzles fairly quickly. We’ve seen this in Iran, Iraq and Lebanon, three Awakening era countries that I’ve written a lot about on this web site, all having had crisis wars in the 1980s. The political chaos always reflects the themes of the preceding crisis war, and always pits the generations of war survivors, who attempt to impose austere measures to prevent a new war, against the younger generation, born after the war, rebelling against those austere measures.

Today, there are three major political factions in Iran:

 

  • The current government, led by President Mahmoud Ahmadinejad and supreme leader Ayatollah Ali Khamenei. These are the group of crisis war survivors that have held political power since the 1979 revolution. With regard to the question of the return of the Mahdi, they tend to be “Hasteners.”
  •  

  • The “Opposition”: Mir Hossein Mousavi, Mohammad Khatami, and Mehdi Karroubi. These were the candidates that opposed Ahmadinejad in the June 12 presidential election. They lead a group of reformers that want to leave the Islamic Republic in place, under the leadership of Ayatollah Khamenei, but they want to replace Ahmadinejad with someone more moderate. With regard to the question of the return of the Mahdi, they tend to be “Patient Awaiters.”
  •  

  • The “Kids”: the younger generation, the 70% of the population born after the 1979 Islamic Revolution. The Opposition and the Kids were allies during and after the June 12 election, but they have entirely different goals. Unlike the Opposition, the Kids are pro-Western and pro-American, and want to dismantle the religious Islamic Republic, and change it to a secular Persian Republic. The two groups are allied for now, but at some time in the future they may be enemies.

One thing that should be clear from the above description is that even if Ahmadinejad steps down and is replaced by someone from the Opposition, the riots and demonstrations won’t stop.

It’s also pretty clear that as the older generations die off, and the size of the younger generations grows from 70% to 80% to 90%, the Kids are going to win. The only question is how long it will take, and how chaotic the transition will be, over the next 10-15 years.

The growing theological dispute

At the beginning of this report, I referenced a new BBC documentary by Edward Stourton. That documentary was triggered when Stourton submitted some questions to Grand Ayatollah Hoseyn Ali Montazeri via his web site. Montazeri is one of Shia Islam’s most respected theologians, and much to Stourton’s surprise, Montazeri answered the questions with detailed replies.

Here are some excerpts:

 

“Q: What is your view of claims that Mahmoud Ahmadinejad is in contact with the Hidden Imam and that his government is working for the return of the Mahdi? …Montazeri: During his occultation or disappearance it is possible to establish contact with His Holiness the Hidden Imam (may God speed his return). But anyone who made such contact would never dream of announcing it publicly because making use of such claims for propaganda and political purposes would be contrary to the qualities required for such contact. The best way to prepare for the re-appearance of the Hidden Imam would be to act in accordance with Islamic teachings in order to establish justice and Islamic values in society.

Q: How far has the current regime fallen – in your view – from the ideal of the Islamic Republic?

Montazeri: Although some sincere and faithful people have made great efforts and endeavours now and in the past to implement the goals of the revolution, unfortunately, due to the short-sightedness, ineptitude and lack of wisdom, as well as arrogance and neglect of the demands of the majority of the people by a small inefficient minority, many of the initial ideals of the revolution have not been fulfilled. In view of this, our people are very dissatisfied and they protest against the deviations from the goals of the revolution. …

Q: What (if anything) should Iranian clerics do to bring about change in Iran?

Montazeri: The important action that the esteemed Iranian clerics can and must take in order to initiate reforms, to change the present situation and the current policies, must be in step with the people – with intellectuals and experts, with the members of the elite and with committed political activists. The clerics should tell the people of their rights. They must also remain faithful the values of the revolution and to the goals of the reforms. Otherwise, their social standing among the people will become weaker and shakier.”

The fact that a high level Iranian cleric would be openly critical of the government with the press shows how deeply the Islamic government is under attack.

Effect of Iran’s conflict on Islam

If you look at the 20th century from the point of view of Islam, there have been two major earth-shaking events.

The first was the destruction of the Ottoman empire after World War I. Centered in Istanbul, Turkey, the Caliphate had been the office of the supreme spiritual leader for Sunni Muslims worldwide, and it was abolished, leaving Sunni Muslims around the world rudderless. After several decades passed, this rudderlessness turned into al-Qaeda and international terrorism.

The second was Iran’s Islamic Revolution of 1979. For the first time since the 1920s, there was an Islamic state, and a revolutionary method for achieving it. Unfortunately for the Sunnis, Iran is a Shia Muslim state, so it didn’t help them. But it did reveal a path by which a Sunni Muslim state might appear again.

Just as Iran’s leaders have been trying to recapture their own revolutionary unity by provoking a confrontation or even an attack by Western powers, Islamist Sunnis have been trying to provoke a war in various countries, in the hope of creating a Sunni Muslim state.

They’ve tried this in Iraq, Somalia, Afghanistan, Pakistan and Uzbekistan, and it is still the main goal of al-Qaeda. The inspiration provided by Iran’s Islamic Revolution of 1979 has been a guiding light to Islamist Sunnis around the world for 30 years.

The interesting question then arises: What will Islamist Sunnis around the world conclude about Iran’s Islamic Revolution, now that the Revolution appears to be unraveling? Will they still try to follow the same path, or will they change tactics in some way, trying to learn from Iran’s experience? Only time will tell, and this is something to be watched.

In fact, Sunni clerics in other countries are beginning to point to a possibly fatal flaw in Iran’s system of government: the core belief that supreme leader Ayatollah Khamenei should have the final say on all Iranian foreign and domestic policies.

What is happening in Iran at present, is “an explosion as a result of a deep existing contradiction in the political system in Iran, which has a religious base, and at the same time seeks to pass on authority through democratic means,” according to Sunni scholar Khaled al Dakheel, a professor at King Saud University in Riyadh, Saudi Arabia.

Basically, the question is how you can have a democracy of the people, when a single religious leader has the final say on everything? At its core, this is a political struggle over the question of separation of Mosque and State, a conflict that occurs, in one way or another, in almost every country.

From the point of view of Generational Dynamics, the major trends have not changed. As I’ve said many times, it’s my expectation that Iran will be the ally, not the enemy, of America, Israel and the West, in the Clash of Civilizations World War. In Asia, Iran will be allied with India, Russia and America against China and Sunni Muslim countries, including Pakistan, Uzbekistan, and the Arabs.

The theological debate and political chaos in Iran are part of the scenario that will take us in that direction.

(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (9-Nov-2009) Permanent Link

Palestinian president Mahmoud Abbas says he’ll step down following Hillary Clinton’s statement on settlements
Is it a tactical manoeuver or the end of an era?

Mahmoud Abbas was born in 1935 in what is now northern Israel. His family were among hundreds of thousands of Palestinians who fled or were driven from their homes in the genocidal 1948 war between Palestinians and Jews that followed the partitioning of Palestine and the creation of the state of Israel.

So as a young teenager, Abbas and all his friends were fully exposed to the horrors of war all around them. This is the kind of “generational child abuse” that Generational Dynamics talks about. Kids who live through this kind of experience, like America’s Silent Generation, grow up never wanting their own kids or grandkids to experience something so awful.

So when Abbas was elected President of the Palestinian Authority in January, 2005, it appeared to the world that the “Mideast problem” would finally be solved. Abbas was considered more “moderate” than his predecessor, Yasser Arafat, and Abbas was committed to implementing the Mideast Roadmap to Peace that had been put forth by the Bush Administration in May, 2003. With Arafat gone, and Abbas in place as President, the Roadmap would finally be implemented, leading to two states, Israel and a Palestinian state, existing side by side in the Mideast, in eternal peace and happiness.

Actually, the euphoria surrounding Abbas’s election was ridiculous, as were the unrealistically high expectations that Abbas had raised during the campaign. As I wrote at the time, one day he would speak in Arabic and promise the Palestinians the “right of return” to the lands occupied by the “Zionist enemy.” The next day, he would speak in English, and promise to rid Palestine of the terrorists.

(The obvious comparison is with President Barack Obama, who made similarly extravagant and unrealistic campaign promises — cure global warming, provide universal health care, close Guantanamo, leave Iraq in peace, bring a two-state solution to Palestinians and Israelis, beat the Taliban in Afghanistan, restore the stock market bubble, and dismantle President Bush’s war against terror. Now we’re seeing that he appears to be failing at every one of these promises.)

Instead of bringing peace, Abbas’s presidency has only made things worse. There have been three “small” wars: Israelis vs Hizbollah in Lebanon in 2006, Palestinian Fatah vs Hamas in Gaza in 2008, and Israelis vs Hamas in Gaza in 2009. There’s no reduction in tension whatsoever, and it’s only a matter of time before one of these small wars triggers a larger war.

The latest crisis occurred because one of President Obama’s unrealistic promises intersected with one of President Abbas’s unrealistic promises. Since taking office, President Obama has demanded that the Israelis stop building settlements on land that would be part of the Palestinian nation under the Roadmap to Peace. As recently as June, in his speech in Cairo, directed to the Muslim world, President Obama said, “At the same time, Israelis must acknowledge that just as Israel’s right to exist cannot be denied, neither can Palestine’s. The United States does not accept the legitimacy of continued Israeli settlements. This construction violates previous agreements and undermines efforts to achieve peace. It is time for these settlements to stop.”

But the Obama administration appeared to change policy last week, when Secretary of State Hillary Clinton praised as “unprecedented” Israel’s compromise offer to slow down, but not stop, construction of settlements.

This change of position has infuriated may Arabs and Palestinians, and it triggered Abbas’s decision to step down as President. Abbas put it as diplomatically as possible when he said,

 

“We pledged, us and the Israelis, with the participation and sponsorship of the international community, to reach a two-state solution. But month after month, year after year, there was procrastination and the increase of Jewish settlement and Israeli settlement on our land, which compromises the credibility of negotiations. …The stated position of the United States in relation to settlements and the Judaisation and annexation of Jerusalem are well-known and appreciated by us. However, we were surprised by their favoring of the Israeli position. But the problem which requires a solution is … the ongoing Israeli settlement activities in all of the West Bank and especially in occupied East Jerusalem, which is facing an unprecedented change to its character.”

It’s impossible to know at this time if Abbas seriously plans to step down, or whether he’s using the threat of stepping down as a negotiating strategy.

If Abbas does stop down and is replaced by someone younger, it will be the end of an era. Someone younger will certainly be more demanding and confrontational than Abbas, and this will change the political climate in the Mideast.

As I’ve been saying since 2003, Generational Dynamics predicts that we’re headed for a major crisis war in the Mideast, re-fighting the genocidal 1940s war between Arabs and Jews. I speculated in 2003 that the death of Yasser Arafat would trigger such a war, but although things have gotten steadily worse since Arafat’s death, the major war is yet to come.

(Comments: For reader comments, questions and discussion, see the Mideast thread of the Generational Dynamics forum.) (7-Nov-2009) Permanent Link

Budget deficit triples (yes, triples!) in 2009

Budget deficit triples (yes, triples!) in 2009
One of the major causes is falling tax revenues.

Two years ago, I wrote the article, “One, Two, Three … Infinity,” in which I compared to the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s.

My use of that particular phrase was to convey the idea that American debt was on an exponential growth path that would not be stopped except by a major financial collapse and crisis.

As if to prove the point, the Congressional Business Office has announced that for the fiscal year ending on September 30, 2009, the budget deficit was $1.4 trillion, more than tripling the record 2008 deficit of $459 billion. There is absolutely no reason to believe that any steps will be taken to prevent the deficit from doubling or tripling again next year.


Annual tax revenues <font size=-2>(Source: CNN)</font>
Annual tax revenues (Source: CNN)

One major reason is the collapse in tax revenues. As I wrote two months ago in “US tax revenues fall sharply, the most since 1932,” tax revenues for fiscal 2009 have fallen by almost 50% from last year.

Other reasons include the bailouts and stimulus packages.

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

It is mathematically impossible for this rapid exponential growth to continue indefinitely. It is politically impossible to end this rapid exponential growth without a major financial crisis. Therefore, it will be stopped only by a major financial crisis that includes a major stock market crash.

(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.) (8-Oct-2009) Permanent Link

 

 

The current stock market bubble correlates with bailouts and stimulus

The current stock market bubble correlates with bailouts and stimulus
This is another refutation of Richard Koo’s stimulus theories.

An analysis posted on the “Jesse’s Café Américain” blog provides an explanation for the current stock market bubble that’s been soaring since March. The analysis shows that stimulus, bailout and quantitative easing money from the government is highly correlated to the current stock market bubble, implying that this government money is pouring into stocks and boosting this new bubble.

The following graph of the adjusted monetary base provides an indication of the amount of money that’s been injected into the economy by means of bailouts, stimulus and quantitative easing:


Adjusted monetary base <font size=-2>(Source: Jesse's Café Américain)</font>
Adjusted monetary base (Source: Jesse’s Café Américain)

The above graph shows that the monetary base has expanded from $900 billion in late 2008 to $1.9 trillion today, a $1 trillion increase in the last year.

But where has that $1 trillion gone?

In the past, I’ve posted several discussions on presentations by Richard C. Koo, Chief Economist at Nomura Research Institute, on the experience of the 1930s Great Depression and the 1990-2005 “lost decade” in Japan. (See, for example “Fiscal stimulus programs in 1930s and today.”)

The theory presented by Koo is the entire basis in mainstream macroeconomic theory justifying the large stimulus programs being implemented by the Obama administration, as well as by countries around the world. As explained in the Koo presentations, this theory is based on the following assumption: That the stimulus money will first create jobs, and then will return to the Treasury in the form of bond purchases, because there’s nowhere else for the money to go.

So where has all the money gone?

It certainly hasn’t gone into bank lending, as the following graph shows:


Total bank credit <font size=-2>(Source: Jesse's Café Américain)</font>
Total bank credit (Source: Jesse’s Café Américain)

The above graph shows that bank lending has plummeted, even as $1 trillion in bailouts, stimulus and quantitative easing has poured into the economy.

This is what’s expected from Koo’s concept of “balance sheet recession,” his name for a deflationary spiral. During such a period, assets are destroyed, but debts remain, so everyone is in debt. People and businesses refuse to go even deeper into debt, and instead of spending any money they have, they either save it or use it to pay down debt. Either way, it goes into a bank, which (according to Koo) uses the money to purchase government bonds, thus returning the money to the Treasury. But the bank does not risk lending the money out, which is consistent with the above graph.

But what if the money was somehow being used to buy stocks? There’s certainly a correlation, as shown by the following graphs of the S&P 500 price/earnings ratio (also called “valuations”):


Price/earnings ratios, based on operating earnings and reported earnings <font size=-2>(Source: Jesse's Café Américain)</font>
Price/earnings ratios, based on operating earnings and reported earnings (Source: Jesse’s Café Américain)

Notice that the as-reported P/E ratios began skyrocketing at exactly the same time that the stimulus money started pouring out. Also notice that the operating earnings P/E ratio has also been soaring.

(For a discussion of “operating” versus “as reported” earnings, see “Wall Street Journal sharply revises its fantasy price/earnings computations.”)

The following graph overlays the monetary base with the reported earnings P/E ratio:


Monetary base overlaid with price/earnings ratios based on reported earnings <font size=-2>(Source: Jesse's Café Américain)</font>
Monetary base overlaid with price/earnings ratios based on reported earnings (Source: Jesse’s Café Américain)

These graphs show that the bailouts, stimulus and quantitative easing are highly correlated with this years stock market bubble. Correlation doesn’t imply causation, of course, but the size and duration of this year’s stock market bubble has been extremely puzzling, and this correlation provides a highly credible explanation.

This is an extremely significant conclusion because it strikes at the heart at the macroeconomic justification for the massive stimulus programs. For stimulus to work, it’s absolutely essential that the stimulus money create jobs and then come back into the Treasury through saving and debt reduction.

If the money is being channeled into the stock market, then much of it will “leak” out of the country into investments in other countries, thus defeating the purpose of the stimulus.

How much longer can this go on? How long can the Fed and the Treasury pour out hundreds of billions of dollars to expand the stock market bubble? That can’t be predicted, of course, but every bubble has to burst some time, and all it would take is some surprise event to trigger a panic.

The “Jesse’s Café Américain” article contains another interesting chart:


Wealth disparity -- income share of top .01% of the population -- 1913 to present <font size=-2>(Source: Jesse's Café Américain)</font>
Wealth disparity — income share of top .01% of the population — 1913 to present (Source: Jesse’s Café Américain)

Related Articles

 

Fiscal stimulus

The current stock market bubble correlates with bailouts and stimulus: This is another refutation of Richard Koo’s stimulus theories…. (14-Oct-2009)


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)


I’ve often wondered about the wealth disparity and income inequality statistics. I’ve been reading for years that income inequality has been increasing, and I felt intuitively that this had to be related to the generational financial cycle.

This graph supports the conclusion that income inequality is a generational trend. It seems that income inequality increases substantially during the generational stock market, real estate and credit bubbles, and then presumably crashes along with the stock market.

In fact, we can think of wealth disparity as just one more bubble that’s still growing today, and will crash along with the other bubbles.

I was shocked earlier this year when Citibank, Bank of America and other banks announced that they would continue paying million dollar bonuses. These and other banks had caused the financial crisis by creating worthless structured securities and fraudulently selling them to investors. Paying big bonuses to people who defrauded the public for years is, at the very least, a public relations disaster.

What’s become apparent in the last few months is that this disaster goes far beyond simple public relations. Citibank, Bank of America and other banks have been screwing and gouging their own customers in order to provide the cash flow to justify the million dollar bonuses. Stories abound about banks arbitrarily raising interest rates to 30%, doubling or tripling minimum payments, or engineering phony fees of hundreds or thousands of dollars per customer.

In one sense, this should be no surprise at all. The same people who made billions of dollars selling worthless structured securities to investors are now making billions of dollars by gouging their own customers. They’ve changed only their methods, not their patterns of behavior.

As I’ve mentioned several times on this web site, when I was growing up in the 1950s, my parents and my teachers really hated bankers, but I never understood why. I sure understand why today. Bankers did exactly the same kinds of things in the 1930s that they’re doing today. Many bankers went to jail by the end of the 1930s, and the rest of them were hated for decades.

If you look at the narrative that I’ve presented in this article, you can see some ironies. These banks have received hundreds of billions of dollars in bailout money, and are benefiting from the stimulus and quantitative easing programs. They aren’t lending any of this money to consumers, since credit card defaults might reach as high as 10-15%, and they’re evidently not investing the cash in safe Treasuries. Instead, a lot of the money is being channeled into stock market bubble, and when that bubble bursts, they’re going to lose much more money than they would have from credit card defaults.

That’s not all. If you look at the last graph above, the wealth disparity graph, and you see what happened in the 1930s, then you can predict what’s going to happen before long now. That wealth disparity is going to disappear, as the Principle of Maximum Ruin catches up with the bankers who have been perpetrating all these misdeeds, defrauding investors and gouging customers. It’s a modern morality play.

From the point of view of Generational Dynamics, you can see how the circle is closing. I know that long-time readers of this web site are sick and tired of hearing me endlessly talk about the “The nihilism and self-destructiveness of Generation X,” and how the lethal combination of greedy, nihilistic Gen-Xers, along with greedy, incompetent Boomers, has brought about the current financial disaster.

Now we’re beginning to see how the people in this lethal combination used destruction and nihilism to lay the seeds for their own self-destruction. Not only will most of them lose all their ill-gotten wealth, but many of them will go to jail. The rest will be hated for decades.

To that end, a significant criminal trial began on Tuesday. Two former Bear Stearns executives, Ralph Cioffi and Matthew Tannin are charged with securities fraud and face 20 years in prison if convicted.

It’s no surprise that Bear Stearns executives defrauded investors. (See, for example, “Bear Stearns bails out defaulting hedge funds, preventing broad market meltdown.”) But there’s increasing momentum in public opinion building that people who perpetrated this fraud should be punished, just like the 1930s.

As I’ve said many times, there’s no doubt whatsoever that fraud was rampant. It was absolutely clear by 2006 that the real estate bubble was bursting, and that the computerized risk models that had been used to justify the creation of mortgage-backed structured securities were based on incorrect assumptions. If investment bankers had been honest, then they would have warned their investors that something was wrong. Instead, they redoubled their efforts to sell these securities (now called “toxic assets”), paying themselves huge commissions for each sale. Thus, there’s absolutely no doubt at all that massive fraud was going on. However, this is all circumstantial evidence, not enough to convict anyone in court.

And political figures are just as guilty as investment bankers. This has nothing to do with any political party. You have Robert Rubin from the Clinton administration, Henry Paulson from the Bush administration, and Larry Summers from the Obama administration — all of them made many millions of dollars participating in this fraud, and they’re still running things. Journalists are to blame as well. They’ve lied about this fraud because they didn’t want to lose advertisers.

In the Ralph Cioffi / Matthew Tannin case that begins today, prosecutors have obtained the e-mail messages they exchanged in March 2007. These messages indicate that they were telling each other that the funds were likely to crash, while they were telling investors that they were solid. If prosecutors obtain a conviction against Cioffi and Tannin, then they will have opened the door to obtaining convictions against other investment bankers.

This brings us back to the original subject of this article. Cioffi and Tannin are typical of an entire generation of investment bankers, real estate execs, politicians, journalists, and others who believe that rules don’t apply to them, and they’re allowed to screw anyone they want to make as much money as they want. The bailout, stimulus and quantitative easing money is supposed to be used for consumer loans and job creation. Instead, it’s being channeled into the stock market bubble, undoubtedly by people who are paying themselves fat commissions for brokering stock purchases. This causes even more damage to the economy in general, and encourages ordinary investors to invest in the bubble, and risk losing everything.

In other words, the same people who created the financial crisis for their own gain are now prolonging and worsening the financial crisis, for their own gain.

(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.) (14-Oct-2009) Permanent Link

The global housing bubble began in the mid-1990s.
This completely explodes the myth that Alan Greenspan caused the housing bubble.

A few weeks ago, I posted the article “The housing bubble began in 1995.” Tha article was based on an analysis that showed that the American housing bubble began in 1995.

From the point of view of Generational Dynamics, that conclusion makes perfect sense. The dot-com stock market bubble also began in 1995. Both bubbles occurred just as the generations of survivors of the 1930s Great Depression were all disappearing (retiring or dying), all at once. Those people had pursued risk-averse investment policies for decades, but by the mid-1990s, they were replaced in senior management positions by Boomers who had no regard for old fogey risk aversion.

Now, a new report by McKinsey Global Institute completes the picture.

Consider this graph from the report:


Housing price index in various countries, 1970-2008 <font size=-2>(Source: McKinsey Global Institute)</font>
Housing price index in various countries, 1970-2008 (Source: McKinsey Global Institute)

This graph shows that, just as in the United States, housing prices in many countries around the world soared, starting in the mid-1990s.

It is thus completely impossible for Alan Greenspan’s Fed to have caused the housing bubble by lowering interest rates in the 2002-2005 time frame.

What this DOES show is that the same generational changes that occurred in America also occurred in countries around the world. This is not surprising, since the 1930s Great Depression was a worldwide event, not restricted to the United States.

An interesting exception is Japan, whose real estate bubble began in the mid-1980s — also at the same time as the beginning of their own stock market bubble! (See “Japan’s real estate crash may finally end after 16 years” for a complete analysis.) And that is also precisely the time that the survivors of Japan’s previous generational stock market crash (1919) all retired and died.

I’m always hearing from people who say that “you haven’t proven any of the claims you make about Generational Dynamics, and the things you’ve gotten right are just lucky guesses.” Well, I don’t know how much more proof you need, and Generational Dynamics seems to produce one “lucky guess” prediction after another. (See “Generational Dynamics forecasting methodology” and “List of major Generational Dynamics predictions.”)

The analysis that the global housing bubble began in the 1990s in multiple countries around the world really completes the picture, and provides almost irrefutable evidence of the validity of the Generational Dynamics analysis of the financial crisis.

There’s plenty of criticism these days of mainstream macroeconomics, which has totally failed to predict the financial crisis, and mis-predicted many things. (I was reminded this weekend that Ben Bernanke said early in 2008 that the “subprime mortgage crisis was completely contained,” and would not affect the broader economy.) And yet, mainstream economists seem to have some kind of neuron dislocations in their brains, that make it impossible for them to understand generational explanations of macroeconomic trends, no matter how obvious the generational explanation is. If economists began incorporating generational theory into their macroeconomic models, then they’d finally start producing more accurate results, though they may not like what they get.

(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.) (12-Oct-2009) Permanent Link

 

Nouriel Roubini apparently is predicting a global market crash

Nouriel Roubini apparently is predicting a global market crash

Many others are experiencing a “sense of foreboding,” according to Gillian Tett of the Financial Times. In a recent article, Tett quotes a banker correspondent:

 

“Forget about the events of the past 12 months. … The punters are back punting as aggressively as ever. Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds. …Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months. … Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”

Tett concludes by saying, “It is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.”

The title of Tett’s article is “Rally fuelled by cheap money brings a sense of foreboding.” She refers to the same facts that I referenced a couple of weeks ago in the article “The current stock market bubble correlates with bailouts and stimulus,” Since that time, it’s been more and more widely recognized that the current stock market rally is being fueled by governments around the world pouring out free or low-cost money, via central banks and fiscal policy.

On CNBC on Monday morning, NYU professor Nouriel Roubini discussed explicitly how central banker policy was creating a “wall of liquidity” that was feeding a new worldwide asset bubble, growing larger than the last one. Along the way, he appears to be predicting a global market clash with near certainty.

The following is my transcription. The lines in brackets [] are paraphrases of interviewer questions.

 

“[Could we see the stock market run continue?]Yes, in the short run what’s happening is that there’s a wall of liquidity, not just in the United States but around the world, that’s chasing assets — it’s equities, it’s commodities, it’s gold, it’s emerging market asset classes.


Nouriel Roubini <font face=Arial size=-2>(Source: CNBC)</font>
Nouriel Roubini (Source: CNBC)

And now we have even the mother of all carry trades. Everyone is borrowing short, shorting the dollar, borrowing and investing in assets all over the world. Global equities, comodities, credit, emerging market asset classes.

The risk is however, right now people are borrowing at zero percent interest rates in the United States. Effectively the rate of borrowing is negative, because with the dollar falling — ?? in the capital gain, — you’re buying any asset around the world. All these assets are perfectly correlated.

Eventually, the dollar cannot keep on falling. Once the dollar stops falling, it reverses. You have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world. That’s a risk.

[Is that anywhere near happening?]

No, it’s not near happening because for the time being the Fed is keeping short rates at zero, expected to remain zero, and the Fed is becoming the biggest seller of volatility because it’s buying $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility on the long end is low, and on the short end is zero, so this game is played until ????.

[Question about central banks]

There’s a gap between what you have to do for the real economy, and what you have to do for financial stability. The real economy is still weak. There’s deflation actually in the economy. Look at the cycle 2001-2006. They kept the fund rates all the way down to 1% through 2004, three years after the recession was over. Then they did step by step [raises of] 25 basis points every six weeks.

This time it’s the same, only worse. Output has fallen 4%, not 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We have actual deflation rather than risk of deflation.

So if the Fed wants to target the real economy and avoid deflation, it has to keep the Fed funds rate at 0 for longer. But if it does that, then you create another huge asset bubble.

With the carry trade, that asset bubble is now becoming global, and everyone has to follow U.S. monetary policy by intervening in a non-sterilized way. That eases money at reduced rates, and therefore we’re exporting our monetary policy to the rest of the world.

And that’s leading to a global asset bubble. And once there’s the unraveling of that carry trade that eventually is going to occur, because the dollar cannot keep on falling, then you can have a market crash on a global basis.

[q: Is this current asset bubble worse than the one that preceded the fall of Lehman?]

It could become worse because if the Fed keeps the rates at zero, and if the Fed keeps controlling and reducing volatility on the long end, then everybody is playing the same game. Everybody is buying dollars and going long in risky assets all over the world.

[Have we put out one fire, only to create another one?]

I think we have two objectives here — stabilize the real economy, and avoid financial instability. But we’re using one target, the Fed funds rate, to target the real economy, but we’re creating a new asset bubble, bigger than the previous one, and that’s a mistake we’re doing right now.”

Roubini’s reasoning can be summarized as follows:

 

  • The Fed’s zero percent interest rate policy is creating a “wall of liquidity.”
  •  

  • Investors are using the carry trade — borrowing dollars at zero interest rates, and buying risky assets around the world — equities, commodities, emerging market asset classes. This is creating a new asset bubble, bigger than the previous ones.
  •  

  • This will continue as long as the dollar keeps falling. But eventually the dollar MUST stop falling.
  •  

  • At that point, the carry trade will reverse, and investors will have to return the dollars they’ve borrowed. This means that they’ll all sell their equities, commodities, emerging market asset classes, all at the same time, creating a global market crash.

I’ve read through this transcript several times, and I don’t see that he’s left much doubt that this is going to happen. The only point of ambiguity in what he’s saying is the timing. He says that it won’t happen soon because the Fed will keep interest rates low for a while, but surely he realizes that isn’t the issue. The trigger will not be the Fed funds rate, which is set by policy; the trigger will be the ending of the fall of the dollar, and that’s set by the market. And with deflation already occurring, the dollar could stop falling at any time, irrespective of the Fed funds rate.

As usual, you have to ask the question, “What would Nouriel Roubini say if he believed that a global market crash was imminent?”

And the answer is that he’d be saying what he said in the above transcript.

He wouldn’t be talking about a global market crash at all if he thought it was a distant possibility; the fact that he seems to predict it indicates that he believes that it could happen in the near future.

I’ve always been puzzled by what people like Nouriel Roubini and Ben Bernanke really believe. As I’ve been saying for seven years, a market crash MUST occur with 100% probability by applying the Law of Mean Reversion. I don’t expect the man on the street to understand the Law of Mean Reversion, but I DO expect professors of economics at NYU and Princeton to understand the Law of Mean Reversion.

This is the first time that I’ve heard Roubini, or indeed any major financial official in Washington or around the world, predict a market crash. This is a big change in opinion by Roubini, or at least a big change in what he’s saying.

From the point of view of Generational Dynamics, the increasingly reckless behavior of financial institutions explains why there MUST be a major stock market crash, and that the worst, by far, is yet to come.

Citibank is an archetypal example of what’s going on. The financial engineers and managers at Citibank were prime perpetrators in defrauding investors and the public in creating structured securities that are now called “toxic assets,” and they did so in such a way that they could pay themselves billions of dollars irrespective of how many other people lost everything.

And now those same people at Citibank are charging millions of their own customers 30% interest, and using the money to pay themselves hundreds of millions of dollars in additional bonuses. This appears to me (as a non-lawyer) to be criminal extortion. Citibank appears to be turning into a criminal organization.

I’ve been talking for several years about the debauched and depraved abuse of credit that we’ve seen in financial institutions, and I’ve been increasingly sickened and disgusted as I’ve seen it get worse and worse, as long-time readers of this web site are well aware. But I just can’t find the words to describe what I’m seeing today in Citibank and elsewhere. I’ve lived a long life in America, and I’ve seen individual examples of criminal behavior, including such people as Bernie Madoff. But I’ve never seen any behavior so nauseating and loathsome as I’m seeing in Citibank and other places. I truly believe that many of these people are going to go to jail, as their counterparts did in the 1930s, and no one will be happier to see that than I will.

But getting back to the generational point, you can see why there MUST be a major stock market crash. The portion of the crisis that’s occurred so far has done nothing to curb the behavior of financial engineers and managers at Citibank in using fraud and extortion to pay themselves million dollar bonuses. The only thing that will stop them, and other bankers like them, is a financial crisis that will destroy Citibank itself. (This is why I often talk about the “The nihilism and self-destructiveness of Generation X.”) Citibank gouging and screwing their own customers with 30% interest rates is so self-destructive that it almost appears to be a last act of desperation.

(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.) (27-Oct-2009)

”Too bad for all the WASPs.” Radical America, conservative Russia?

”Too bad for all the WASPs.”

A recent AP article, with a ‘fait accompli’ attitude toward multiracialism in America, drew a lot of responses at Yahoo.

This one, for example, illustrates an unfortunately popular attitude:

Future shock! Here you have the future USA — brown skin, brown eyes, brown hair, and speaking Spanish. Too bad for all the WASPs.”

And this one:

I’m my great grandfather was native American. My mother in law is half native American. The pot has melted a long, long time ago. It’s time we stop grouping everyone by the color of their skin.”

It sure looks as though the media and the school system are propagating their message successfully: ‘

… that’s a good thing with respects to there being a better understanding that classifying a “race” has nothing to do with genetics. Genetically, humans are humans. Genetic differences is reflected in our physical appearence but not psychological demeanor. A human is a human. We are different in physical appearence and “cultural” heritage, but even that is determined by a person’s belief system and not genetics. So, if humans are humans and we’re learning to understand we’re only different culturally, not racially or genetically, that’s a good thing. It’s bad news however for those who continue to propogate [sic] the untruth that one so-called “race” is somehow inferior or superior to another because of their genes.”

Wait, there’s more where that came from:

First of all, there are no pure racists [sic]. Scientists came out years ago and stated that there is truly no such thing as race as we think of it. Secondly, there have been multi-racial people in the US since slavery. It is only recently that multi-racial Blacks began to feel comfortable with embracing heritages from all sides of their families. The one drop rule prevented this and then, as a matter of pride, only the Black side was recognized as this was how they were identified in society. Next, there are issues which face those of mixed heritage, where it is apparent from their appearence, that do not face members that do not have an obvious mixed heritage. Folks need to get over the whole race thing. It is backwards and holds the US as a country back.”

So, I guess the fact that a racially conscious America, as traditional America was, was a much better-educated, better-functioning, safer country is just a coincidence. And the fact that our present aracial, PC America, where ignorant people say ‘there is no such thing as race‘, is dysfunctional, divided, and dangerous is mere coincidence.

I’ll give credit where due; there are some good responses which sound like they could be written by one of the regular commenters on this blog, and that’s cause for hope. There is a sane and honest remnant out there, but we mustn’t get complacent and think things are going our way. We still have a tough row to hoe.

The first comment I quoted, with the statement ”too bad for all the WASPs” is the kind of thing that led to my starting this blog. If you go back to my archives, back to April 2006, you will see that I started, rather tentatively, by asking who we are, as a nation. Back then I was just starting to think many of these things through, as I could see the demographic and cultural trends, and I was troubled by them. My journey over the last few years has taken me, obviously, further to the right, but really it has all been a rediscovering of what my parents and grandparents believed and taught me.

They were not ”bigots” or ”haters” and they were not aberrations in their time. Racially conscious beliefs were the norm back then, yes, even in much of the North. Society moved to the left since I was a child, and many of those who were born after the reign of political correctness are not aware of how the changes took place. They have been sold a bill of goods, that the older generations were racist and malicious, hating people for absolutely no reason except ‘skin color’ or religion or ethnicity. This is a slander on our ancestors.

In part, I wanted to unravel all the lies and misrepresentations of political correctness, and to do justice to our unfairly maligned forefathers. I wanted to undo the lie that our history is shameful and a reason for guilt, and a justification for things like affirmative action, coerced ”diversity”, quotas, and all the rest of these Marxist policies.

When you blog about such highly-charged matters, criticism and outright attacks are par for the course, but nonetheless, they are no easier to bear on a regular basis for that reason. I am not so thick-skinned that I am impervious to the negative stuff. However, I haven’t so far let it change my course.

Every now and then someone tells me I am hateful, or divisive, or ‘too exclusivist’ or too narrow or that I will drive potential friends away by being exclusivist. I’ve been told in a friendly way that I must stop being pro-Southron or pro-Confederacy because it alienates and it’s too controversial. Again, I should not have to say this, but I don’t look to exclude or ”attack” anyone, merely to express my honest thoughts and opinions. If I have to self-censor so as not to offend anyone or exclude anyone, I would rather not blog. The best thing about blogging, at this point, is that it offers a rare chance to speak freely and candidly. That opportunity may not always exist, if things continue as they are.

That some out there will not agree with me is a given. That some reading my blog may be offended or angered by what I write, that, too, is to be expected. I get angered sometimes by other blogs, and usually just click away from that blog and stop visiting, if their views and mine cannot meet. I often express disapproval of ‘Ellis Islanders’, the descendants of the EI-era immigrants — not because I “hate” those ethnicities, like the Irish or Italians. If I hated the Irish, I would not at one time have planned to live in Ireland. Beyond that statement, I feel no need to go into pander mode to show my lack of prejudice; I know it’s PC to say ”some of my best friends are [fill in the blank with ethnicity].”

And it should not be necessary to say this, but I welcome all who consider themselves ‘old Americans.’ You need not be of colonial stock if you consider yourself a citizen of traditional America, and if you have no problem with WASP Americans, who after all, did found this country.

It is a sad commentary that I have to make any kind of disclaimer about simply stating the fact that English colonists founded America as we know it. That simple statement was just fact to most pre-PC Americans; no one thought to take offense or exception to it, even if they themselves were not WASPs or ‘Mayflower descendants.’

Nobody has reason to be offended if I hark back to old Anglo-Saxon America, as I’m fond of doing. Up until the late 1960s, that was the default culture for all White Americans, at least those who did not have recent immigrant origins. Even an Eastern European immigrant like Balint Vazsonyi, who came here in the late 1950s, enthusiastically embraced Anglo-America, and defended it beautifully. But those days seem to be gone.

Anglo-America is disparaged and derided from all sides, and those few of us who defend it and our ancestors are accused of divisiveness and ‘exclusivist’ attitudes, if not outright bigotry. And if I accept the current PC opinion that there is no White American culture or people, if WASPs are just nobodies, without race, nation, ethnicity, or culture, what do we have, then, to unify us here in America? Whiteness?

Many people think this, too, is tenuous and lacking in substance. What does ‘Whiteness’ entail? I think there is a recognizably White culture, and there are commonalities between us and our European cousins, but the fact is, many of them don’t see it that way. Their ethnic/regional identities trump Whiteness, which is just implicit to them.

So on what basis can White Americans form any sense of community and commonality, if the old default Anglo-America is considered ”exclusivist” and narrow? I think we are in a quandary if we take that attitude. What then? Are we reduced to trying to eliminate ethnocentrism, as I blogged about the other day? I don’t think that will work, as I said.

So for now I will do what I do, even though it will not be to the liking of everybody. I don’t write in hopes of attracting a mass audience. I don’t even really enjoy the blogs which draw hundreds of commenters; such discussions too often end up being trivial, or rancorous, or just plain incoherent and confused, with too many voices clamoring against each other. I don’t covet a huge readership. I don’t want to go mainstream. If a few of my ideas (which somehow manage not to offend) somehow disseminate outward, that is all I would hope for.

I want to speak on behalf of the people, the ‘old Americans’, especially (but not only) the Anglo-Americans, who are never mentioned except when a villain or scapegoat is needed, or a caricature along the lines of the bland, blond, vacuous WASPs of the stereotype. When Anglo-Americans are remembered at all, it is as either upper-class New Englanders or lower-class, rural rednecks. And maybe there are some people like that, but nonetheless they are my kin and my people, and I will not be found among those who slander or slur my kin. I will defend them when they are in need of defending, and I will honor my forefathers and remember their accomplishments. There are only a few of us who do this and I think our side deserves its defenders and keepers of the national memory.

Some time back, fellow blogger Mark who used to blog at Western Survival, said in a comment here that he thought this blog and his blog needed more positive names. ‘Vanishing American’ and ‘Western Survival’, he thought, sounded rather doom-and-gloomy. I agreed with that idea, though I had no ideas about a better and more positive name for this blog.

Should this blog be called something else? In line with what I have been talking about in this post, maybe this blog should be called ‘The Forgotten American’ since most people have forgotten Anglo-Americans, but oh well, they were only the founders of this country. However the term ”Forgotten Americans” has been used for political groups with a conservative/populist agenda. The ‘forgotten Americans’ are supposedly the conservative working class, Nixon’s Silent Majority, more or less. Maybe the ‘Silent Majority’ should have been this blog’s name, but to me it has Nixonian associations.

Or maybe this blog should have been dubbed ‘The Invisible American’ because, as I said, most old-stock Americans are not even visible or counted as worth notice by many other Americans. Again, though, it has that forlorn sound, and again, it’s been used to describe every downtrodden group from American Indians, blacks, gays, surrogate mothers, Asian-Americans, and the ‘working poor.’

Maybe the term ‘Displaced American’ or ‘Dispossessed American’? Or maybe ‘Amnesic American’ should have been my choice, since so many of us have forgotten who we are and who our ancestors were. I think we all need a refresher course in who we are, and where we have been, in hopes of regaining our lost memories and the confidence that we lost with them. We need to have a living past in order to look to a future.

Radical America, conservative Russia?

Over at An Irish Tory, there’s an interesting piece on Russia and America, contrasting the two countries, with America coming out much the worse in comparison.

I have noticed on some of the nationalist blogs I browse that many disillusioned American and other Western right-wingers tend to admire Russia, particularly in the person of Vladimir Putin, as being the potential savior of ”The West”. I can honestly say that I don’t know enough of Putin or of Russia to be willing to exalt him or see him as the Great White Hope, literally. And I am not even sure whether Russia is truly of ”the West”, to be technical. I don’t think the level of animosity and bitterness that developed during the Communist era between the Eastern bloc countries and the capitalist West can simply evaporate overnight, as some people believed it could and did after the Berlin Wall came down.

American conservatives have taken to proclaiming that Ronald Reagan ”won the cold war” and that once Mr. Gorbachev tore down that wall, we and the people of the Communist countries would be the best of friends. I don’t believe that; I believe the wall may still exist, culturally and philosophically, although paradoxically our country, especially under the current regime, is moving closer to the old Soviet model.

I don’t think, from my admittedly sparse knowledge of current events in Russia, that they are in fact our allies or potential allies, and it’s my impression that they still regard us with suspicion at best. I think prudence would warrant some wariness on our part.

But has our country, as An Irish Tory implies, switched places with Russia, becoming the ‘evil empire’ as Reagan termed the Soviet Union, while Russia is now a beacon of conservatism?

I don’t think America was ever the ‘conservative’ power we were told it was, America has always been a radical power, whether it is the free-masonic ideals of ‘life, liberty and the pursuit of happiness’, or the appeal to equality apparent in the Declaration of Independence right up to the modern feminist movement and anti-racism, America has always been a hothouse for radical ideas, and intellectual ferment, meaning left wing intellectual ferment.”

Has our country always been ‘radical’ and egalitarian? Was Thomas Jefferson proposing today’s radical egalitarianism when he wrote his infamous phrase (recite it with me, please) ”all men are created equal”?
Was our ‘separation of Church and State’ policy proof of our radicalism? I trust most of us here know that there is no such policy enjoined by our Constitution; that phrase is not in any of our founding documents, appearing in a letter which Thomas Jefferson wrote to the Danbury Baptists in 1802:

Believing… that religion is a matter which lies solely between man and his God, that he owes account to none other for his faith or his worship, that the legitimate powers of government reach actions only, and not opinions, I contemplate with sovereign reverence that act of the whole American people which declared that their Legislature should ‘make no law respecting an establishment of religion, or prohibiting the free exercise thereof,’ thus building a wall of separation between Church and State.”

It is only in recent decades that this statement has been used and abused to remove religion — no, more precisely the Christian religion — from the public square. It was not intended to do so, nor did it do so for the first 200 years approximately of this Republic.

Over the years of trying to discuss politics and current affairs with many people of different European countries, I have become increasingly convinced that perhaps one has to be an American to truly understand our peculiar ideals and ways as laid out by our Founding Fathers. And it’s sadly true that many American-born people have begun to view our traditional America as being unenlightened and parochial, by contrast to Europe. The latter group is now in charge of our country.

As to whether America from its inception has been a hotbed of radicalism, I think that our Revolution was positively staid as contrasted to the French Revolution, with its massive bloodshed and its overturning of tradition in virtually all areas of life. In the newly-established United States, there were no large social upheavals, and daily life for most people went on much as always, under new governance, with more freedom, but still in most respects unchanged.

There was no native-born titled aristocracy to remove or purge in this country, and I can’t imagine even the most zealous of our Founding Fathers taking part in the Jacobin-style excesses in any case.

Abraham Kuyper said, in On Calvinism and Politics:

And if any one should still doubt whether or not the American revolution was homogeneous with that of Paris, this doubt is fully set at rest by the bitter fight in 1793 between Jefferson and Hamilton. Therefore it remains as the German historian Von Holtz stated it: “Es ware Thorheit zu sagen dass die Rousseauschen Schriften einen Einfluss auf die Entwicklung in America ausgeubt haben.” (“Mere madness would it be to say that the American revolution borrowed its impelling energy from Rousseau and his writings.”) Or as Hamilton himself expressed it, that he considered “the French Revolution to be no more akin to the American Revolution than the faithless wife in a French novel is like the Puritan matron in New England.”

I think the radical egalitarianism that has so marred today’s America is an echo of the Jacobins’ beliefs, not of our own more moderate traditions. The left of 2009 are simply today’s Jacobins, motivated by the same beliefs.

Groen van Prinsterer writes about their motivations here, and they sound very much like those of today’s left:

They had dedicated their lives to a worldview which they believed to be not only true, good, useful, and salutary, but also the sole and sure means of effecting a speedy and universal end of calamity and misfortune and the beginning of undisturbed happiness. We know their views. That the earth throughout all ages had been a theater of misery as a result of violence and hypocrisy; that princes and priests had made a pact to enslave the wretched nations body and soul in the double chain of compulsion and superstition; that the narrow and degrading dogmas of Christianity respecting man’s depravity and powerlessness had been utilized to press humanity, under the banner of justice and morality, into an artificial mold restricting all freedom of movement and development. Hence there came about so much and so many kinds of unhappiness and suffering; hence domination and slavery; wealth and poverty; unrest, strife, war; sorrows and crimes without number, the succession of which constitutes the history of the world. A philosophical rebirth from this piteous degeneration would, by its warm glow, put an end to this condition. Even now a light had been kindled in the darkness; even now rights were being brought to light which had fallen into oblivion. To observe the precepts of philosophy would mean to destroy prejudice and tyranny, to establish liberty, to guarantee prosperity, abundance, true culture and refinement, yea step by step to re?create and perfect the human race. Envy and strife would be quelled; the happiness of all would harmonize with the utility of all; there would be peace on earth, truth, justice, mutual love, obedience to the precepts of nature—not by curbing but by gratifying one’s desires and passions—, mutual assistance, brotherhood; in a word, instead of misery there would be bliss. Now might come to pass what had been impossible in the times of this ignorance. The opportunity was there. In France the grandiose task of educating humanity could be undertaken and completed. What a prospect! ”

Prinsterer wrote of the fanaticism of these men and women, and of their belief that their goals justified any means, no matter how horrible.

None of those who founded this country shared this attitude, and the Revolution they effected was not so much a revolution in the sense of overturning an existing order, but mostly a secession, as I said here recently.
However, what has happened during the last five decades does constitute a second, true revolution which is an overturning of the existing order.

Coincidentally, some of the same themes come up in this piece at The New Criterion, where Mark Steyn writes about ‘The State Despotic.’

The French revolution abolished everything and subordinated all institutions to the rule of central authority. The New World was more fortunate: “The principle and lifeblood of American liberty” was, according to Tocqueville, municipal independence. “With the state government, they had limited contact; with the national government, they had almost none,” writes Professor Rahe:

In New England, their world was the township; in the South, it was the county; and elsewhere it was one or the other or both… . Self-government was the liberty that they had fought the War of Independence to retain, and this was a liberty that in considerable measure Americans in the age of Andrew Jackson still enjoyed.

For Tocqueville, this is a critical distinction between America and the faux republics of his own continent. “It is in the township that the strengths of free peoples resides,” he wrote. “Municipal institutions are for liberty what primary schools are for science; they place it within reach of the people.”
[…]
When something goes wrong, a European demands to know what the government’s going to do about it. An American does it himself. Or he used to—in the Jacksonian America a farsighted Frenchman understood so well. “Human dignity,” writes Professor Rahe, “is bound up with taking responsibility for conducting one’s own affairs.” When the state annexes that responsibility, the citizenry are indeed mere sheep to the government shepherd. Paul Rahe concludes his brisk and trenchant examination of republican “staying power” with specific proposals to reclaim state and local power from Washington, and with a choice: “We can be what once we were, or we can settle for a gradual, gentle descent into servitude.”

Steyn is not sanguine about our future; read the rest at the link.
I do think the description of our slide into despotism is accurate.

America of 2009, I am grieved to say, bears little resemblance to the America of 1776 or even 1976. Change has taken place at a dizzying speed in the last decade or two, and even more so since January of this year. I am one who agrees that we are becoming a socialist country and a multiracial empire, but this is not our original nature; it is not who we are, and it does not reflect the nature or the character of old-stock Americans. You can’t remake a country demographically and expect it to retain its character and way of life. There is a whole new population being installed here to replace old Americans, and the America that much of the world loves to hate these days is this new changeling America, morphing from what it was into something unknown. And this is not by the choice of the citizenry of this country.

A dozen years ago, British journalist Ambrose Evans-Pritchard, who knows America very well, said the following:

The American elite is almost beyond redemption… Moral relativism has set in so deeply that the gilded classes have become incapable of discerning right from wrong. Everything can be explained away, especially by journalists. Life is one great moral mush — sophistry washed down with Chardonnay. The ordinary citizens, thank goodness, still adhere to absolutes… It is they who have saved the republic from creeping degradation while their ‘betters’ were derelict.”

Whether the elite is beyond redemption — and I’m inclined to agree they are — I hope the ‘ordinary citizens’ are not, although in the dozen years since Evans-Pritchard wrote that paragraph, we have veered away from our previous certainties and absolutes somewhat. Is there hope for us?

Or was our Republic flawed from the beginning, and is it ‘inevitable’ that we would end up where we are today?
I’d like to hear your thoughts.