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	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 06-Apr-05
Analysts: Worldwide economy is getting weaker

Web Log - April, 2005

Analysts: Worldwide economy is getting weaker

After Greenspan's January warning that the global economic dangers are "without historical precedent," other pundits are beginning to take up the theme.

In Fed Chairman Alan Greenspan's January speech, he indicated that Fed actions since the beginning of the 1990s bubble have been based on the erroneous assumptions that the American economy is sufficiently self-contained so that the Fed's near-zero interest rate policy would prevent a new 1930s style Great Depression. Because of the global nature of the economy today, Greenspan is no longer certain.

Now other analysts are beginning to fill in some of the blanks.

Now that the Fed is being forced by concerns about the falling value of the dollar to raise interest rates again, ntelligence service Stratfor.com points out that these interest rate hikes are going to hit China especially hard.

Chinese "debt is extremely vulnerable to interest rate hikes," says says the intelligence service, as quoted by financial analyst Joe Duarte in a column. "As rates rise, that debt will become impossible to maintain, and China will face the beginnings of a financial crisis. Given the makeup of the Chinese financial system, such a development is unavoidable. The only questions regarding the crisis to come are time frame and severity."

Duarte adds that the Chinese economy has to hit a "bump in the road" sooner or later, and that could happen later this year, perhaps in July or August, the "traditional time for markets to start stumbling." With the Fed raising interest rates, American debt-ridden households will be in a cash flow crunch, and "the Chinese economy is suddenly drained of foreign cash," with unspecified geopolitical instability.

Morgan Stanley chief economist Steven Roach in his weekly commentary says that "A US-centric global economy continues to run on fumes."

He points out that "lagging employment and real wage growth has been a hallmark of the first half of the 2000s in the developed world. Unemployment in Europe and Japan is hovering near-post-World War II highs. The US is in the midst of the weakest period of job creation in modern history -- its unemployment rate has been depressed by those fleeing the work force. Jobless recoveries have become the norms in most major segments of the developed world. And they persist to this very day."

The picture that Roach and Stratfor are painting is of a hollow American economy, but also equally hollow Japanese and European economies. The only country that's actually producing real manufactured goods is China, which depends on America as a market, and also on Japan and Europe to a lesser extent.

From the point of view of Generational Dynamics, America, Europe and Japan are all in generational crisis periods, facing the following problem: The Great Depression of the 1930s forced most organizations out of businesses, and their replacements were super-efficient, "lean and mean," with every employee doing a much needed job.

Today, over 70 years later, all those businesses have themselves become increasingly bureaucratic and inefficient, bogged down by stale, mindless, uninspired executives managing a sluggish, rule-bound work force more concerned about work breaks than working. This is true for all countries that fought in WW II, but it's perhaps most apparent in parts of Europe where it's actually against the law for anyone to work more than 40 hours per week. The only way way to fix this problem, unfortunately, is a new "cleansing" Great Depression, which is what we've been predicting since 2002. This is based on a historical analysis of secular adjustments that come every 70 years or so (Tulipomania bubble (1637), South Sea Bubble (1721), French Monarchy bankruptcy (1789), Hamburg Crisis of 1857, and 1929 Wall Street crash).

China is filling this gap, because it's a little bit behind America, Japan and Europe on the generational timeline. China is in a frenetic "generational unraveling" period, suffering from a heroin-like addiction to 20 years of 9% annual growth. When China has a recession, as everyone agrees it must, then China will move to a "generational crisis" period, as its economy starts collapse in the same way that has happened in America, Japan and Europe.

Interestingly enough, Stephen Roach gives an incorrect explanation of the global economic problems. He blames on the Internet, and its ability to create a "global labor arbitrage" which, for the first time, makes it possible to outsource all kinds of activities, including "software programming, engineering, design, accounting, medical technology, legal and actuarial expertise, and financial analysis at the upper end of the value chain."

However, this analysis doesn't stand up. Transportation and communications technology has been improving exponentially for centuries. The worldwide installation of international phone services in the 1950s-70s was just as significant then as the internet is today, but didn't cause the hollowed out economies we see today.

If you want to see the real problem, look at the article by Patrik Jonsson in csmonitor.com today, entitled "As China sews, few US mills left." It points out that only 677,000 textile and apparel jobs remain in America, down from 1.6 million in 1994. These jobs disappeared because of inefficient American textile mills, most of which have now been converted or bulldozed into the ground. What do closing textile mills have to do with the Internet?

Both Duarte and Roach point out that current conditions cannot continue much longer, and that a major correction is coming. From the point of view of Generational Dynamics, this correction will come in the form of a new Great Depression, with the same kind of bankruptcy, unemployment and homelessness as in the 30s. As Roach and Duarte point on, it's no longer a matter of "if." The only thing we don't know is "when," and that can't be too much longer. (06-Apr-05) Permanent Link
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Generational Dynamics Web Log for 06-Apr-05 Analysts: Worldwide economy is getting weaker

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Generational Dynamics Web Log for 06-Apr-05
Analysts: Worldwide economy is getting weaker