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

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Generational Dynamics Web Log for 18-Nov-2010
18-Nov-10 News -- Lessons learned from from financial crisis so far

Web Log - November, 2010

18-Nov-10 News -- Lessons learned from from financial crisis so far

The worst is yet to come

Lessons learned from from financial crisis so far

The worst is yet to come

On Bloomberg TV on Wednesday, Neel Kashkari, Pimco Head of New Investment Initiatives, was asked what lessons have been learned so far in the American and European financial crises, and what advice he'd give the Europeans now (my transcription):

"The lesson that we learned is that we're always behind, always trying to play catch up, always hoping that the crisis won't be as bad as we feared, and it's always been worse.
So I see that happening in Europe now. It's spreading from Greece to Ireland -- people are very afraid that it spreads to Portugal to Spain, eventually, and that's what the EU is so focused on - preventing it from spreading.
My advice to them would be - jump ahead. Look ahead 2-3 years . What is this likely going to look like in 2-3 years, and get to that solution as quickly as you can, because the band-aids that they're putting on them right now are buying them some time, but unless they deal with the solvency issue, it's not really a solution."

This is a very interesting proposal because it makes so much apparent common sense and yet is impossible.

From the point of view of Generational Dynamics, there has already been a massive change in attitudes and behaviors. Boomers and Generation-Xers who were risk-ignorant in the early 2000s bubble have been badly burned, and will remain extremely risk-averse for decades, as happened after the 1930s. Policymakers don't understand this, and think that with the right political speech or the right policy, the bubble mentality will return.

To make matters worse, there's less money in the world every week than there was the week before, because the hundreds of trillions of dollars of synthetic securities that were created during the bubble are still being dissolved, causing a massive deflationary spiral.

So if the Europeans try to take Kashkari's advice and look ahead 2-3 years, what they'll see is a much bleaker situation. As Kashkari himself pointed out, politicians always think that the crisis won't be as bad as feared, but it's always been worse. This is the nature of a generational Crisis era.

If you want to understand what's going on in the world today, one of the best ways is to read "The bubble that broke the world," a 1932 book by Garet Garrett. He writes,

"Mass delusions are not rare. They salt the human story. The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the common-stock mania of a recent time in Wall Street. But a delusion affecting the mentality of the entire world at one time was hitherto unknown. All our experience with it is original."

Garrett describes exactly how the mass delusion unfolded in the 1920s and early 1930s, especially the interactions between the Americans, the Germans, the French and the British. This kind of account is extremely valuable for a Generational Dynamics analysis because it shows what people were thinking at the time, unfiltered by later ideologies.

The same kind of mass delusion occurred during the real estate and credit bubbles, and is still going on today. This can be best understood by reading Garrett's book. You have to make some adjustments, such as the fact that today America is a debtor nation and China is a creditor nation. This book provides a great deal of insight into how events will be unfolding for the next few years.

From the point of view of Generational Dynamics, the worst part of the global financial crisis has not yet occurred. What must still happen is a major international panic, like the crash that occurred on October 24, 1929, that will be remembered for decades. This panic will be necessary to unify policymakers and force them to make real changes.

It's impossible to predict when and where that panic will begin, but as we see officials in Europe dithering around with Ireland, Greece and Portugal, it seems more and more likely that it will start in Europe.

(Comments: For reader comments, questions and discussion, see the 18-Nov-10 News -- Lessons learned from from financial crisis so far thread of the Generational Dynamics forum. Comments may be posted anonymously.) (18-Nov-2010) Permanent Link
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Generational Dynamics Web Log for 18-Nov-2010 18-Nov-10 News -- Lessons learned from from financial crisis so far

Lessons learned from from financial crisis so far

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Generational Dynamics Web Log for 18-Nov-2010
18-Nov-10 News -- Lessons learned from from financial crisis so far