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

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Generational Dynamics Web Log for 9-Jan-2010
9-Jan-10 News - Corruption is increasing in China

Web Log - January, 2010

9-Jan-10 News - Corruption is increasing in China

As financial imbalances grow around the world, say goodbye to Saab.

Simon Johnson predicts financial "catastrophe"

Simon Johnson, MIT School of Management professor, and Peterson Institute Senior fellow, predicts financial catastrophe on CNBC:

Johnson talks about a financial "catastrophe" in the offing. He makes the following very interesting argument: The last crisis (beginning in 2007) was caused by banks that were "too big to fail" taking huge risks with other people's money.

Today, the biggest banks are even bigger, and are even more reckless than ever in taking risks. They can do this because they know that they're "too big to fail," and so they know that they can take any gamble they want: if they succeed, they'll make a lot of money, and if they fail, the government will bail them out.

Therefore, if the last crisis was caused by banks "too big to fail," then there must be an even worse crisis coming soon.

From the point of view of Generational Dynamics, this argument makes sense. The Great Depression of the 1930s made the survivors extremely risk-averse. When those survivors disappeared (retired or died) in the 1990s, they were replaced by Boomers and Gen-Xers who abused credit, causing the dot-com bubble and the credit/real estate bubble. The current crisis will not end until the new generations of Boomers, Gen-Xers and Millennials learn their lessons, and become extremely risk-averse again. The fact that they haven't yet learned that lesson is proof that the worst is yet to come. It's like an alcoholic who doesn't stop drinking until he really hits bottom.

Johnson points out the enormous hubris of these bankers. Goldman Sachs, for example, was bailed out by the government, but is just about to pay $20 billion (with a "b") in bonuses. It's amazing.

Another interesting thing about the above video is that the CNBC anchors don't believe a word that Johnson is saying. They haven't learned their lessons either.

Corruption grows in China

Johnson predicts a financial crisis in China, similar to Japan's massive crash in 1990.

However, as we've written many times, a financial crash will be much worse for China, as even the Beijing government fears it will trigger a huge civil war.

The NY Times reports that wealth hedge-fund investor James S. Chanos is saying that China is in a huge real estate bubble, "Dubai times 1,000 — or worse," headed for a major crash.

In fact, a new report in China daily says that corruption is spreading throughout the grass-roots levels of China's government and state-owned enterprises (SOEs).

An interesting take on all this is to compare the generational timelines of the U.S. and China. America's Recovery era began in 1945, when WW II ended, while China's Recovery era began in 1949 when the Communist Revolution civil war ended. You can't be very precise when it comes to mapping these generational changes forward, but roughly speaking we can assume that China is a couple or a few years behind America in its generational changes. Since America's crisis began in 2007, we can assume that China is very close to a similar crisis.

A BBC report ties everything together by describing the resentment that ordinary Chinese people feel over the massive corruption. "There is widespread anger at the ostentatious lifestyle enjoyed by some Communist Party officials, police chiefs and bosses of state-owned companies," it says.

Even without Generational Dynamics, one can see that China is headed for a very substantial crisis. (See also: "Skyrocketing real estate prices in China alarm officials.")

Europeans are in denial over worsening economy.

Things are bad in America and China. Europe doesn't escape.

Eurozone unemployment is at 10%, headed for 11%. The level is at 20% for young people. Latvia is the worst off, at 22.3%. Spain is in second place, at 19.4%

European commentators call them the "P.I.I.G.S". Those are the Eurozone countries -- Portugal, Ireland, Italy, Greece and Spain -- so much in debt that they may default on their sovereign debt.

According to Lobito, a member of the Generational Dynamics forum visiting us from Portugal: "[A]lmost every one [in Portugal] is blind. I try to talk and people call me a pessimist or they say I´m too young to know anything about anything." So it seems that the Portuguese are as deeply in denial as the Americans and the Chinese are.

Euro Intelligence tells us that the EU may not bail out Greece if it's about to default. Jürgen Stark of the European Central Bank (ECB) is quoted as saying, "The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece."

The EU is conducting a grand experiment right now, by appearing willing to allow countries to default. If Greece or Spain or Portugal defaults on its sovereign debt bonds, then will the damage be contained? Will it spread to other countries in the EU? Will it spread to other countries around the world? Nobody knows.

Getting back to America, California and Illinois are also close to defaulting on their bonds. No one knows what effect that will have either.

It looks like the end of the road for Saab cars

I've known several people who REALLY love Saab cars, and I imagine many of them are crying in their beer tonight. But while Saab owners are merely sad, European politicians and labor unions are absolutely furious, according to a report in The Guardian. General Motors has appointed liquidators to shut down the Swedish car firm, despite the fact that two or three other firms have expressed an interest in acquiring Saab, but apparently GM didn't consider them to be serious offers.

The good news for Saab lovers is that there may be a fire sale of existing stocks of Saab cars.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread, the China thread, the Portugal thread, and the Europe thread of the Generational Dynamics forum. Read the entire Financial Topics thread for discussions on how to protect your money.) (9-Jan-2010) Permanent Link
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