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Generational Dynamics Web Log for 15-Apr-2010
15-Apr-10 News -- Six nations discuss sanctions targeting Iran

Web Log - April, 2010

15-Apr-10 News -- Six nations discuss sanctions targeting Iran

A European confrontation over Greece appears increasingly likely, and soon.

Tension over Iran's nuclear development grows

Iran's nuclear program <font size=-2>(Source: AFP)</font>

Iran's nuclear program (Source: AFP)

Iran is 3-5 years away from deploying a "usable" nuclear weapon, according to Pentagon officials quoted by the Washington Post.

As Iran's bluster on nuclear technology increases (though Iran says it's only for peaceful purposes), western nations, especially Israel, are becoming increasingly nervous.

One fear is that the Israelis will becoming sufficiently nervous that they'll take military action against Iran.

Thus, six countries, Britain, China, France, Russia, Germany and the United States, have resumed closed-door bargaining to agree on sanctions, according to AFP.

However, it seems unlikely that there'll be any agreement on meaningful sanctions. China's Foreign Ministry spokesman is already quoted by Xinhua as saying that "sanctions and pressure cannot fundamentally resolve the issue." Thus, we can expect them to exercise their veto in the United Nations Security Council if sanctions are put to a vote.

This is just one more example of a situation that won't be resolved until a major crisis forces a resolution.

Arab states express nervousness about nuclear Iran

As we've said many times, the Sunni Muslim Arab states do not welcome a more powerful Iran that wants to gain hegemony over the entire Arabian peninsula.

Thus, a (Saudi Arabian) Al-Arabiya editorial translated by Memri states the problem in a very interesting way:

"We are not afraid of an Iranian bomb. This weapon will not be put to military use; it will be used as a way to change the rules of the game.

What we are afraid of is Iran's policy, that uses all means to force its existence [as a regional power], and nuclear weapons is only [one of these] means. If Saddam [Hussein] had had a nuclear bomb when he invaded Kuwait, it would have remained occupied to this day, because the superpowers would not have risked war with a state with nuclear weapons. If [a nuclear] Iran tomorrow takes over Bahrain – something that is altogether possible – or if its militias take over southern Iraq, no superpower will dare to use military means to stop it. The international community will [only] have the options of conducting negotiations and bargaining with Iran, or of implementing economic sanctions against it – [tactics] that everyone knows never deterred any occupier in the past, and will certainly not deter Iran...

We fear the logic of the current regime in Tehran, which spent the country's funds on Hizbullah, Hamas, the extremist movements in Bahrain, Iraq and Yemen, and the Muslim Brotherhood, and supported every extremist in the region. The Ahmadinejad regime aspires to expansion, hegemony, and a clear takeover on the ground, and to do this he needs a nuclear umbrella to protect him from deterrence by [any] superpower.

The Gulf states, that built giant cities and factories all along the coast, will, when Iran possesses nuclear weapons, become hostage to the caprices of Ahmadinejad and his extremist government...

The region cannot be left to the test of reality. When we find out that the reality is painful, we will have already missed the chance [to change it]."

Saudi Arabia and Iran are challenging one another on many fronts. (See "24-Feb-10 News - Iran captures Jundallah terrorist leader.") So it's not surprising that the Saudis fear that a nuclear-armed Iran would make the situation much worse in the region.

A European confrontation over Greece appears increasingly likely

Once again, the Greeks had a bond sale on Wednesday. And once again, the yields (interest rates) demanded by investors were extremely high -- 6.99% for 2-year notes, according to Bloomberg. This figure is much higher than the 4-5% that Greek politicians have previously said was the most they could afford.

And so the conclusion on Wednesday is the same as it was on Monday and Tuesday -- that the song and dance that went on in Brussels on Sunday was a farce and a waste of time. It accomplished nothing.

The article quotes a director at Fitch Ratings as saying that will soon have to ask the European finance ministers to come through on their promise of aid. "I don’t think Greece would go as far as waiting to be seen as failing in the market. They would prefer to go to the EU. It could well be a week or two. I don’t think they could leave it much longer than that."

If Greece "asks for aid" within a week or two, then it will launch a series of severe reactions. In Germany, where there is enormous public opposition to helping Greece, there will reviews by the parliament and the courts, as we've been reporting.

Asking for aid could well be a big trap, according to FT. According to the Sunday agreement, Greece may not receive aid unless "market financing is insufficient" -- meaning that Greece is in default. Thus, just ASKING for aid is equivalent to a default.

It's clear that the current situation is unsustainable, and that a major confrontation must occur soon. Whether that's in a couple of weeks or farther out remains to be seen.

Fed chairman Ben Bernanke warns that economy is worse than reported

Also unsustainable is the current U.S. deficit, according to testimony by Fed Chairman Ben Bernanke before Congress on Wednesday. Here's an excerpt from his testimony:

"In addition to the near-term challenge of fostering improved economic performance and stronger labor markets, we as a nation face the difficult but essential task of achieving longer-term sustainability of the nation's fiscal position. The federal budget deficit is on track this year to be nearly as wide as the $1.4 trillion gap recorded in fiscal year 2009. ...

In particular, the Administration and the Congressional Budget Office (CBO) project that the deficit will recede somewhat over the next two years as the temporary stimulus measures wind down and as economic recovery leads to higher revenues. Thereafter, however, the annual deficit is expected to remain high through 2020, in the neighborhood of 4 to 5 percent of GDP. Deficits at that level would lead the ratio of federal debt held by the public to the GDP, already expected to be greater than 70 percent at the end of fiscal 2012, to rise considerably further.

This baseline projection assumes that most discretionary spending grows more slowly than nominal GDP, that no expiring tax cuts are extended, and that current provisions that provide most taxpayers relief from the alternative minimum tax are not further extended. Under an alternative scenario that drops those assumptions, the deficit at the end of 2020 would be 9 percent of GDP and the federal debt would balloon to more than 100 percent of GDP.

Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence."

There are two points to take from this testimony:

A realistic assessment is that, under current assumptions, the federal debt will balloon to 100% of GDP by 2020.

"[P]olicymakers [must] move decisively to set the federal budget on a trajectory toward sustainable fiscal balance."

Well, we've just added a huge, expensive new entitlement to the federal budget through the health care bill, and there's no chance whatsoever that policymakers will move decisively to do much of anything except spend more money and make things worse.

In order to change the "trajectory," politicians would have substantially increase taxes or cut entitlements. Neither of those is politically possible until a major financial crisis forces it.

From the point of view of Generational Dynamics, a major financial crisis is coming. The financial crisis that everyone seems to think is over has, in fact, barely begun.

Bernanke on hyperinflation

I want to mention something as an aside. Bernanke was asked something about whether the Fed would inflate the currency to solve the deficit problem. (I didn't hear the entire question, but it was something like that).

He responded by saying that nobody wants that, and by pointing out that even if they did, it wouldn't change anything. Most of the government expenses, including social security and medicare, are indexed to inflation, and so those expenses would right up, and the deficit would hardly be changed.

For those of you who are expecting to see inflation or hyperinflation, this is one more thing for you to think about.

People keep pointing to the hyperinflation of Germany's Weimar Republic in the early 1920s. But as I explained in "The bubble that broke the world," the Weimar inflation was triggered because reparations were paid, and the reparations were to be paid in German marks, not indexed to inflation. So the German government had a powerful political argument for inflating the currency.

There's almost no such political argument today. As Bernanke points out, even if we wanted to inflate the currency, nothing much would change, since most big things are indexed to inflation.

As I've said many times, you should expect a sharp deflationary crash, where the only asset of value will be cash. This could happen at any time -- next week, next month, next year.

Another 'smoking gun' for Citibank

The Financial Crisis Inquiry Commission (FCIC) has found that the Citibank sold CDOs that turned out to be "toxic assets," and guaranteed that investors in the CDOs would not lose money. Citi offered "liquidity puts" that allowed the investors to sell them back to the bank, according to Bloomberg. Citi ended up spending tens of billions of dollars buying them back.

In an interview, committee chairman Phil Angelides said: "One thing that is striking is the extent to which senior management either didn’t know or didn’t care to know about risks that ultimately helped bring the institution to its knees. If you’re having to offer buyers a put back to you, that should be a big red flag."

This is one more example of the "active/passive" paradigm that I've been developing. The active, nihilistic Gen-Xers implemented this "liquidity put" option to obtain more commissions, and their passive, incompetent Boomer managers pretended it wasn't going on - in order to obtain more commissions.

Additional Links

Concern is growing that Syria is supplying sophisticated missiles, capable of reaching Jerusalem, to the militant group Hizbollah. VOA

"Tea Party movement mirrors a deeply divided America." Der Spiegel.

In Thailand, red-shirted protestors are congregating in the tens of thousands at an elite shopping district, calling it the "final battleground" in their fight to oust the current government, led by Prime Minister Abhisit Vejjajiva. NY Times

For techies, here's an interesting article on parallel computing. In order for computers to continue to double in power every 18 months (Moore's Law), new technology advances depend on putting multiple CPUs into a single computer. Intel

Airport body scanners are ok with most U.S. travelers. Fierce Government IT

Researchers are reporting a significant drop worldwide in the number of women dying from pregnancy and childbirth. NY Times. There are always two sides to a story like this. It's wonderful that lives are being saved, but Generational Dynamics predicts that this will only mean that more deaths will occur in the next war.

Lt. Gen. Keith B. Alexander has been named to lead the Pentagon's new command devoted to cyber-war. NY Times

(Comments: For reader comments, questions and discussion, see the 15-Apr-10 News -- Six nations discuss sanctions targeting Iran thread of the Generational Dynamics forum. Comments may be posted anonymously.) (15-Apr-2010) Permanent Link
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Generational Dynamics Web Log for 15-Apr-2010 15-Apr-10 News -- Six nations discuss sanctions targeting Iran