The tipping point of 2008

As before, I have compiled this graph from official figures released by BLS and the US Fed.

Scatterplot of unemployment rate vs real interest rate (3-mo. treauries - inflation).

As some commentators have noted, the fall in unemployment rate is not supported by the fall in labor force participation, and it is likely that unemployment is understated because of the large number of individuals who have become discouraged.

In any event, we see a major change happened in late 2008, accompanied by a short-lived spike in real interest rate (mainly due to falling prices). Since then, interest rates have been slammed to real lows, but the unemployment rate has not significantly changed.

The transition from the lower area of concentration to the higher one is an example of a state change in a complex system. The system has switched from one mode of operation to another.

What are the two modes of operation? We can assume that one of them is an ideal economy in which most of the players are involved in some sort of productive enterprise. It is this economy which behaves more-or-less as predicted by economists--a drop in interest rates tends to cause a marginal increase in productive investment.

The trouble is that over the past couple of decades, an increasingly large proportion of economic activity was based on non-productive, or rent-seeking, activities--such as speculation, carry trades, and increased fees for normal financial activity. When the financial crisis hit in 2008, guess which sector received the majority of aid from central banking authorities. It wasn't the productive sector--it was the speculative sector. When you consistently reward an activity, you get more of it. At the same time, the productive sector suffered real damage, and contracted to the point where the US economy is now dominated by rent-seeking behaviour.

In an economy of speculation, lowering interest rates does nothing but reward further speculation (near bottom). If you can borrow ever-increasing amounts of money at near-zero interest, and make progressively larger bets on the global casino until it pays out, then why would you do something risky like build a factory to make refrigerators?

Since the lower interest rates aren't creating employment, the BLS has no choice but to keep removing discouraged workers from the list. It's the only way to reduce unemployment.

Well, keep pushing boys--eventually you'll get that unemployment "rate" down to 6% and you can claim mission accomplished--no matter what the real state of the economy.

Is war really the health of the State?

I've just started looking at this paper (link corrected) by Turchin et al. (2013) (model results here). The basic premise is that the organization of humanity from small hunter-gatherer tribes into cohesive states was driven by intense competition between neighbouring groups--such competition being in the form of warfare. Cultures which developed superior military technology (cavalry, chariots, strategy) defeated their neighbours, which then either adopted the culture or were annihilated.

The model was run on a realistic landscape of the Afro-Eurasian landmass, and the authors claim that the results mirror the historical record nicely, suggesting that war and geography are the key controls on the development of the nation-state.

All figures below come from the Turchin et al. (2013) paper.

Imperial density map (visual likelihood that any particular 100x100 cell 

was occupied by part of a large-scale political unit) during time-slices from 

1500 BCE to 1500 CE.

I'd like to put together a more detailed critique in the future when I have a little more to digest it. My first impression of the model output is that I am not as optimistic about the model as are the authors. To me, it looks like the real world is a lot more culturally cohesive than any of their model outputs.

Imperial density map for 500-1500 CE. History (at left) vs. the model (right).

Reality is richer than the model (it usually is), although the model better matched history in earlier time-slices. I think the authors' world view is somewhat bleak, but admit that it is probably a fairly good explanation in the earliest stages of human history. In later stages, I think cooperative trade played a much larger role the transmission of cultural norms and the formation of large states.

h/t Non Equilibrium Social Science

Reference:

Turchin, P., Currie, T. E., Turner, E. A. L., and Gavrilets, S., 2013. War, space, and the evolution of Old World complex societies. Proceedings of the National Academy of Sciences, early edition (Sept. 23, 2013). doi: 10.1073/pnas.1308825110

Why do Ma and Pa play in a rigged market?

“They have been able to pay off politicians with political campaign funds and have been granted informal and unspoken yet complete immunity from prosecution, setting the scene for even bigger confiscations of investor capital. With the risk of legal repercussions so small and the temptation to steal so large, why would any of them not take advantage? What do they have to do to stop people from entrusting them with their savings? Put up neon signs that say, “We steal your money”?”

                                        – Dimitri Orlov – The Five Stages of Collapse

Sometimes even that doesn't help.

"Darn it, Pa! I told ya not ta buy AAPL on margin!"

"But Ma, I thought you wuz talkin' 'bout apples."

The problem is that Ma and Pa believe they are above average--in intellect, in wisdom, in luck, in investing acumen. When they see that sign that says their money will be stolen, they all have faith that it will happen to somebody else.

When I was a kid, I wanted to be a pool shark. Never mind that I wasn't much good at it. I researched the concept at the local magazine stand and discovered that the secret was not to beat the other guy with great shooting, but to beat him in a way that he would think he had beat himself, through mistakes. The reason it works is because when your victim makes a good shot, he believes that is his normal capability, but a mistake is not--and tends to be discounted. That discounting is essential, because if your victim believes he only lost because of his own mistakes, he will be confident he will win the next time. On the other hand, if you simply run the table, chances are he won't play again.

This only works because people are usually not as clever as they think they are.

Consequently, Ma and Pa can read about what is being done to them--and they will think it is only a problem for other people. Their orders will get filled in a timely fashion. The stocks they buy have true liquidity--not the phantom liquidity of offers that are never to be filled. And when they file for bankruptcy, it will merely have been bad luck.

What's in a bubble?

Bubbles are on a lot of minds lately. Bonds. Housing. Stocks. Are any of these in a bubble? How do we decide? A bubble is usually defined as a situation in which the value of an asset exceeds its true worth. What does that mean? How are we to know that the true worth of something differs from its price? It sounds like something St. Thomas Aquinas would think up.

Here is a reconstructed phase space of what is generally agreed to be a popping bubble--the Case-Shiller index. It's not always clear when the popping takes place. Is it the moment it falls from a high to which it never returns (or at least not for a considerable time)? That's first quarter, 2006 in the above figure. Is it when it becomes clear that no area of stability is going to form in the upper registers of phase space? That would be about the second quarter of 2008 in the above figure. Or is it only when the system returns to the area of stability that characterized it? That hasn't happened yet, but it looks imminent.

For today's discussion, consider the S&P 500 and the price of gold.

"Oy'm winning," sez S&P. Data here and here.

Starting from a remarkably similar starting point, they have reached pretty similar levels. But although the S&P 500 may be slightly ahead over our 20+ year chart, it hasn't always been so. In fact it is painfully obvious in hindsight that switching from stocks to gold in early 2000 would have been especially sweet.

One approach I have been working on is based on the notion of stability. It looks good for the Case-Shiller index at top, but that index has been adjusted for inflation--the gold price and the S&P 500 are not. We may be able to assess stability by reconstructing state spaces from the original time series.

Apart from the run-up in price over the past 20 years, the main feature on this graph is that the plot does not stray far from the green dashed line, which is the only part of the graph where areas of stability can appear. Apart from the cluster at about $300, there aren't any areas of stability. I'm not alarmed by this, and don't expect the $300 area to come into play again. This is a reminder of the importance of adjusting for inflation.

Even though this graph is also not corrected for inflation, it does not behave as the gold chart does, but cycles twice around the yellow dashed circle. In terms of a deviation from the regions of stability, it did get about as stretched as did the housing market, both in January 1998 and November 1999. It's current position is not stable but it is not nearly as extreme as it has been in the past.

Some have suggested that gold price is a proxy for inflation. So let's look at the S&P 500 with respect to gold. The comparison will be as follows: the difference between the S&P and the gold price, divided by the gold price.

Here we see a tremendous peak in early 2000. The current level of the index, however, does not seem out of line with respect to gold. If the S&P 500 is in a bubble, then so is gold.

Both the stock market and the dollar price of gold are influenced by monetary creation. As long as money continues to be created, we should expect both to increase in price. There have been times in the past when the money blew up the stock market much more rapidly than gold, and if that were to happen again, there may be an arbitrage opportunity. Such does not appear to be the case today. I find it hard to imagine that we will see the extremes of early 2000 again.

In a time of monetary or credit creation, there are opportunities to preserve wealth through investments in productive enterprises as well as gold. Unfortunately, it is difficult to distinguish between enterprises that are truly productive and those which merely look productive as long as the credits keep flowing.

Dissection of the Malian crisis

An detailed summary of the crisis in Mali from inception to the present has been recently released by the Institute for the Study of Islamic Thought, and is presented here. (pdf)

What I found striking is that prior to the turmoil, Mali had passed through about 20 peaceful years, including five elections and three peaceful transitions of power. The speed with which the collapse occurred was surprising, and may be an object lesson in the stability of African democracies. 

Game theory and the road to ruin

There's a nice restaurant on a certain beach in Africa, which, according to local lore, was started by a former mafioso who retired to a sunny spot for, shall we say, the good of his health. Of course, it's best to pay no mind to local lore; more likely he was a baker who wanted a nice spot on the beach.

Great lobster, too.

The world is full of criminals--in government, in finance, in journalism, in industry, and even in sports. And lately it seems that the criminality is increasing exponentially.

When pondering the mathematics of criminality, one issue is the nature of interaction between criminals. And here is where game theory has a say. One particular famous story is the prisoner's dilemma, a scenario in which that two criminals have been caught, and are being held separately. If both keep silent, they will only be convicted on lesser charges and face a short prison term. Each is offered a chance to testify against his partner, in exchange for being released (the partner will get a very long prison term). However, if both testify, they will both get long prison terms. There is a chance of improving one's position by testifying; however if both testify, then both will be worse off than if they had remained silent.

The above is a classic problem of game theory. Game theory is a study of human interaction. There is the potential of mathematical treatment, but the decisions are human, and there is no computable best choice that works under all situations. The possibility of strategy arises in any situation where there are interests at cross-purposes. In classical game theory, each player has some control over the situation, but there remain factors which are controlled by the other player(s), and there may be some factors under the control of none of the players.

In the prisoner's dilemma, neither player knows what the other will do. They can only control their own choice. The player's cannot influence the results of their respective choices (the payoff matrix). They don't know what the other is going to do. Moreover, larger society may influence the choices. If both prisoners are members of an organization that has a strict rule of omerta, which greatly increases the cost of testifying against their partner, they may keep silence.

Some problems in game theory involve an optimum choice among strategies. In some games, each player may find a pure strategy to use (meaning always do the same thing). In some games, either player may have to seek a mixed strategy (varying strategies).

Many interactions in society are similar to the prisoner's dilemma--interactions in which if both choose to cooperate, both get a greater gain than is the case if both defect. Since our interactions with our neighbours are ongoing--day after day, we remember how our neighbours acted in the past, and take that into consideration in future interactions. Given repeated interactions, it is overwhelmingly better to cooperate.

In life, we can choose to cooperate, by doing productive work within the context of the law, trading freely with our neighbours; or we may defect, by becoming a criminal, or perhaps a lobbyist, or something less productive and more coercive. Individually, we might benefit, but when the entire society heads down the path of criminal activity, then we are all worse off. To a large extent, society acts as does the criminal organization mentioned above--it is social norms that keep most people on the straight-and-narrow, not the fear of arrest by police.

But what happens if society no longer expects cooperation?

We are seeing the answer all around us.

Consider journalism--at one time one could count on news organizations to report on government with skepticism. More recently, we see the press acting as cheerleaders for the latest government outrage. Here is an example(may require free registration to read). We can see why it happens--newspapers that support the government get improved access: those that continue to treat government statements with skepticism lose accessibility and risk irrelevance.

Consider banking. A few decades ago, the bank made its money by lending responsibly. If you wanted a loan to expand your business, the bank manager would go to your location, and either check the books, or would visit surreptitiously, counting customers and estimating cash flow. Only when satisfied that your business was sound and your expansion likely to succeed would he lend you money. But since that time, the banks have become joined at the hip to government, and live off rent, or by packaging loans and selling them to trusting buyers, while charging heavy fees to customers for the privilege of keeping their money in the bank.

In many of these games--perhaps in all of them--each member of society maximizes his own benefit by defecting rather than cooperating. Tragically, the end result of everyone attempting to maximize his benefit is a society in which everyone is poorer. The mark of a civilized society is one in which the social pressures drive individuals to cooperate.

All this fits in to part of our greater theme of multistability. We can see two areas of stability for a civilization--one in which virtually everybody is engaged in productive enterprise, government is small; and one in which government is large, criminality and the rentier mindset are dominant, but everyone is poorer.

We are witnessing a form of decivilization, in where social weight favours defecting. The only way to return is through revolution--not necessarily violent, but revolution in social expectations. The criminality will only end when society expects and demands change.

The endless crisis in silver

In 1999 I was in dire straits. A company I had done a lot of work for had collapsed, owing me a lot of money. I was in the throes of a life-altering illness. It would be a few years before I could walk again without considerable pain, which is a tough condition for a field geologist. I was desperately broke. And I was reading articles by fellows like Ted Butler about an impending apocalypse in silver, which threw me into a panic. How to get silver before this impending crisis that was due to explode any day now.

There was a coin shop not far from where I lived, and they sold Canadian silver coins--at that time the half-dollars were going for $3. I had no idea how much silver was in them, so I looked it up on the internet, and found that it was probably the cheapest way to buy silver when you only had $20 or so to spare, so I started buying them--them and the silver dollars. Twenty or thirty dollars worth, maybe once or twice a month.

Eventually, health improved, and I did some teaching, and began to buy a little more--but still probably no more than $100 a month. I went to church sales in Leaside, and bought lots of spoons, old-lady jewelry (to this day one of my wife's favourite pairs or earrings I bought at a church sale for $2), and the occasional salt shaker. Within a couple of years these sales became overrun by professional buyers, but when I started I had the field to myself.

In about 2006, the owner of my neighbourhood coin shop congratulated me for my strategy. He saw a lot of people rush into it in 2004, who then rushed out of it when the price suddenly collapsed. One of the clerks in the shop tried to get me interested in some elaborate currency-trading program (probably yen carry-trade, but I didn't look into it). He assured me that with this program I would make money exponentially and be able to retire in only two years. I asked him what was wrong with coming in every time I got paid and buying a little bit of silver, and he just rolled his eyes.

About a year later the coin shop suddenly melted down. I don't know what happened--the owners suddenly had to leave the country with a lot of unpaid debts. I suspected the currency-trading scheme. There were rumours of customers who had put up money for silver or gold that was never delivered, which made me glad everything I had bought was cash-and-carry. The store sat empty for several months before new owners arrived--but it wasn't the same. I started buying elsewhere.

So here we are, nearly fifteen years after I started buying silver. In the past two years I have sold rather than bought. There has been no silver apocalypse, although writers like Ted Butler are still writing about it. To be fair, Butler does state that you should not worry about an impending crisis, just buy silver a bit at a time and put it away. But the underlying message seems to be designed to create an undercurrent of panic. I know, because that's what I felt in 1999.

I like silver. I really do. I'm glad I have some. But I'm even more glad that I bought it a little at a time, and didn't get sucked into the hype about a civilization-altering spike in its price. The argument of impending silver shortages has been out there for decades now. Perhaps it will happen someday. I think the argument is harmful, especially to folks who are just starting out, because it can induce the kind of panic that encourages them to take risks in acquiring silver--risks that are especially harmful in the event of sudden collapses in price (of which there have been several). And if the price spikes don't happen quickly, they are likely to lose confidence.

Syria resolution passes, twitter down

How about that?

Is this one of those coincidences? Or one of those coincidences?

Macro photography: digital or film?

I'm starting to prep for a field program in Sierra Leone again and have come to the thorny problem of photography.

Earlier in my career I used to drag around a Nikkormat, with one wide-angle lens, one 50 mm macro, and a telephoto lens.

Why, there it is, freshly exhumed from the closet where it spent the last ten years or so. Yes, lately I have been using digital.

The trouble is, on the next trip, the macro capabilities are going to be important. And unfortunately, the digital cameras I have offer nothing in comparison to the macro capabilities of above camera, which (with the appropriate lens) can produces an image on the film which is larger than the original object (examples follow).

All of the above were captured on slide film, and then scanned in at home. The coin used for scale is the now-extinct Canadian penny. Scale in the bottom photo is a lens cap. From top to bottom: 1) crinoid ossicle in Silurian dolostone; 2) branching bryozoan (and base of crinoid or blastoid calyx beside penny) in Ordovician shales of the Middle Trenton, Canada Cement quarry; 3) a variety of fossils from the Middle Trenton shales; 4) pyrite replacement on brachiopods, St. Mary's Cement quarry; 5) graphic intergrowth from somewhere in Finland; 6) Precambrian broken algal mat, Rae River, NWT; 7) Gold grain under worker's fingernail, coastal Ghana. All taken more than 15 years ago (scanned much more recently).

Meanwhile, with my present camera, the best I have been able to manage are pictures like these:

Canadian nickel used for a scale. From top to bottom: 1) corals in Silurian dolostone; 2) calcite crystals in a a vug; 3) shells screened off of marine sands, coastal Ghana (mesh size 4 mm, I think).

For the quality of the image, the film camera is better than anything I can afford in the digital realm--but it is bulky, and film processing isn't as easy to come by as it used to be. Especially for slide film, because prints would never have turned out as well. And in SL. 

The great advantage of digital is that at least you know whether or not the picture turns out before you leave the field locality.

At this point I am looking at options. I can borrow a camera that is much better than what I have now, but still not as good for macro. I can buy a newer model, but not a DSLR.