End of 2012

It's already the New Year in Singapore.

Rather than show you fireworks, I've put in here a picture of the rare talipot palm, currently in bloom at the Orchard Gardens here. This tree is about 80 years old. It blooms once in its life (now), then dies.

Unfortunately for me, this has been a gruelling year, both from a professional standpoint and most definitely from an investing standpoint. However, here's hoping the coming year will be better. Given the storms building on the horizon, for those of us working and investing in the precious metals field, it will either be a lot better or a lot worse.

The most-viewed article on this blog (in pageviews, according to Google Analytics) was the big winner last year about Atlantis.

The most-viewed article written this year was the one on scale invariance in avalanches, forest fires and default cascades, which no doubt got a boost by appearing on Zerohedge (where it has far more pageviews than it does here).

Happy New Year all! I have no predictions but intend to still be here.

Merry Christmas all

Merry Christmas to all. Back to business soon.

Not exactly what I'm accustomed to. But warm.

Moneylending is tough in Singapore

According to a story in one of the local papers here in Singapore, people can be jailed indefinitely without trial for "illegal moneylending", whatever that is. Asking for clarification from the locals wasn't reassuring--their understanding is that it meant lending money without formal permission. I guess the banks don't like competition.

Update: Jan. 3 - I forgot to clarify that the article actually says "jailed indefinitely pending trial". So there will be a trial--someday.

Why junior miners suck

It's no secret that junior miners are continuing to do poorly. The reasons include:

1) they are running out of money;
2) nobody cares about their @#%$ drill results;
3) they are caught in a death spiral positive feedback loop brought about by the expectation of low prices, making it hard to raise money, forcing the company to finance at excessively dilutive prices, which helps keep share prices low;
4) company finances are so weak that majors can postpone deals for decent projects until the junior either folds or vends the project for a pittance;
(but you already know all these)
5) and the Aristotlean first cause--NI 43-101 has rendered the business model of junior mining companies obsolete.

Let us review how that business model used to work.

A new company would list and raise a small amount of money at a low price to drill a few holes. With luck, one or more holes would have some promising results--the share price would rise and the company could finance some more work at a higher price. The additional work would hopefully bring about improved results implying an expansion in the area of mineralization. There would be another increase in the share price, and the company would finance again to finance further work. After a few iterations, the company would be able to raise enough money at a reasonable price to finance a program which would define a resource to a high level of confidence, or complete a feasibility study.

Alternatively, the first program would fail to find anything, and the company would be wound up. Thus, either failure (probable) or success would happen quickly. Salaries were minimal, as the principals in the company would have a considerable number of shares or options, so that the early rises in the share price would reward them for their successes.

The business model no longer functions. There is very little movement in share prices from drill results, unless they lead to a favourable resource calculation. This means that enough money has to be raised to define a resource at a very low share price, creating tremendous dilution. It also means that it will take a long time before the project either succeeds or fails. As a consequence, the principals now require salaries (in addition to their shares/options), which greatly adds to share dilution, as these, too, are financed at low share prices. Instead of either succeeding or failing quickly, the process is drawn out over a long time, requiring a lot of money raised at a low price.

What is the effect? In the short to medium term, it means producers will have their pick of excellent prospects from distressed companies which may be acquired at distressed prices. In the longer term it may be the end of discovery of new deposits.

NI 43-101 benefits major companies at the expense of junior miners, as it lowers the cost of picking up projects to replace the ore they mine.

As I have discussed before, NI 43-101 also favours institutional investors over retail investors and large consulting companies are favoured over individual practitioners (it really helps to have a lawyer and an accountant on staff when writing NI 43-101 reports).

Like most legislation, its true intent is the opposite of what has been stated.

Election day

One of my last days here, so I'll make a few observations.

People here are still enthusiastic about elections. They are passionate about their parties. Earlier this week on our way to the Minerals Commission we were held up by traffic going to political rallies. They still hope that government will make their lives better--at the same time, until now, the government's ability to interfere with their lives is still limited as the institutions of total control are undeveloped. But the signs are that they are coming.

People began lining up last night so they could vote today. Accusations of electoral fraud and warnings of ballot box snatchers are the talk of today's news.

One item really caught my eye as it went across the bottom of the TV. "Religious leaders warn politicians not to be too desperate for power as it will incite violence." I wish we saw such warnings at home.

Electricity and the election in Ghana

Once again the national electrical authority has promised that the load-shedding practice (which you might call rolling blackouts or power-sharing) will be suspended before the election--although the starting date has been rolled back to Wednesday.

The election is Friday.

Tonight there was breathless reporting on a major conspiracy to plunge all of Ghana into darkness during the election and vote-counting, so that unnamed nefarious powers could gain some unspecified advantage. Our staff have advised us that this sort of thing is announced before every election.

If they can avoid power-sharing for a few days, why can't they do it all the time?

According to interviews on Joy News, the required additional supply is coming from three sources. An extra 100 MW has been purchased from Cote d'Ivoire, 30 MW is coming from (or rather not being exported) to Togo and Benin, and interestingly, 30 MW is coming from an 80 MW power station built by a consortium of four mining companies. It was not clear whether they meant that the mining companies were generating this power and selling it to the network, or whether it represented power normally supplied by the grid that would be diverted elsewhere.

In case you are wondering why your mining stocks in Ghanaian jurisdictions have been performing poorly lately, there is this.

Another exciting day

Saw something I hadn't seen before (but knew was theoretically possible).

The power went out early this morning. But it wasn't completely out--my computer reported it was still charging, and the lightbulbs in the kitchen were flickering dimly. So I got out the multimeter and measured the  voltage coming out of the wall. It came in at a grand 18 V, less than one-tenth normal. But there were little transient flickers of higher voltage, so I unplugged the computer.

The power came back--sort of. Some things started to run, although the lights seemed unusually bright and the fans were spinning much faster than normal.

When I measured the voltage in one of the kitchen outlets, I measured about 370 V. Again, with transient flickers of much higher voltages. But there were other outlets only producing about 20 V.

Theoretically I knew such a thing was possible. The power coming into the building was three-phase, and many electricians here have hands-on experience without any theoretical knowledge of what they are doing, so after we had the building wired and connected to the grid, the first thing I did was to check the voltage output everywhere possible.

For three-phase power you have a ground and three active terminals. In Ghana, the voltage between the ground and any active terminal is 230-240 V (ideally--although on most days it is considerably less). The voltage across two active terminals will be around 370 V. If the house is wired properly, one-third of the outlets will run off each one of the active terminals and a ground. If the house is wired improperly, it is possible that one-third of the outlets will be run off two active terminals, giving you a voltage at that outlet of 370 V.

In our case I knew the house was wired properly. So the only explanation was that after the first power outage, the electrical workers must have connected their wiring improperly, crossing the ground with an active terminal, blowing up appliances from Bortianor to Kokrobitie.

You'd like to think that electrical utility workers would be better than that. Yes, you'd like to think that.

Argentina sues Ghana over the Libertad

The story of Ghana's seizure of the ARA Libertad caught my eye while on my way to Accra last month. It seems that when Argentina's currency peg collapsed about a decade ago, some private creditors refused to accept the government's repudiation of its sovereign debt. In this case, an investment fund called Elliot Management (with court rulings in its favour) has asked Ghana to sieze Argentinean property--in this case, a tall ship.

What has tongues wagging here in Ghana is the announcement that Argentina will now sue Ghana of this seizure.

Elliot claims to be owed $1.6 billion, so without a highly favourable valuation, the Libertad represents only a drop in the bucket.

It seemed odd to me for Argentineans to be hiring Kwesi and Kwabinah as hired muscle. Ghanaians are too happy-go-lucky to make convincing enforcers. Even in the event that a Ghanaian court agrees that the Libertad is fair game for seizure, history here favours a suboptimal outcome for Elliot &c.

"I'm here for the money you owe my boss! But if you don't have it, that's okay too."

On my first trip here (in 1996), there were highwaymen along the main road, with a noted concentration near Liberian and Leonian refugee camps. Other highwaymen could be encountered on roads all over Ghana, and a common trick was to pound nails through sandals which would be left on the road. When the vehicles stopped to repair tire damage, the thieves would strike.

The encounters went something like this:

"Hand over all your money!"
"Here."
The villains move off.
"Wait! You can't just leave me out here in the middle of the forest with flat tires".
The villains return. They help the victim repair his tires. The villains start to leave.
"Wait! I don't have enough petrol to return home!"
The villains return. They give the victim money for fuel. The villains start to leave.
"Wait! I don't have any money for food on the road!"
The villains return. They give the victim money for food. The villains start to leave.
"Wait! I am going to need a drink with my meal to calm my nerves after this robbery!"
The villains return. They give the victim money so he can buy a beer (or alternatively, apeteshie).
The villains leave, possibly with less money than they started with.

In Ghana it is not uncommon for a Ghanaian to find that he owes the government some heavy sum. But the difference between the stated debt and what is finally paid can be immense--and usually in favour of the Ghanaian. That is because the government here--or, rather, its agens--recognize that they can't destroy someone's livelihood just to collect an arbitrary debt. So debt repayment becomes a negotiation--sometimes a very long one--with a lot of compromise on both sides.

That probably seems incredible to someone in North America or Europe, but it is the reality here where the government's ability to pursue its "creditors" is extremely limited.

The Ghanaian court is apt to look at this whole scenario, and rule that due to the trouble this ship represents, Elliot (or its sub, NML) upon taking delivery of the ship will be paid in full. Of course, they can only take delivery after paying the docking fee and the storage fee at Tema. Then they will have to pay a fee for the security provided by the government of Ghana while the ship was in storage. Then there will be the release fee, the exit fee, the immunization fee for whatever crew are brought in to take the ship back to New York . . .

Gold-silver five-year four-step

It's a dance.

Four steps over the last five years (since the beginning of 2008). Date annotations are mmyy. As before, I have used a one-year lag and a three-point moving average for the gold-silver ratio.

Last time we were here things didn't go so pleasantly. 

The creeping death of a fishery: Ghana (1980-2012)

On the short cool afternoons on our complex outside of Accra, we go up on the balcony, beverage in hand, and contemplate the sea.

Unfortunately the view isn't as good as it used to be, as there has been an explosion of building along the coast, especially hotels. In particular, hotels between us and the beach. So the picture above (taken last year) is not exactly current. But you can occasionally get a glimpse of the fishing boats returning in the afternoon between the block wall that now obscure our view.

Here's how it works. Around sunset, the fishing boats sail off and in the late morning--or possibly the afternoon, they return. The fishing is still pretty good near Accra if you go far enough offshore. The late upwelling has prolonged the good catches this year.

But fishing is meager in the eastern and central portions of Ghana. There used to be far more boats plying their trade than do now.

The artisanal fishery is of critical importance. Nearly 25% of Ghana's population lives in the coastal zone. Until the past decade, approximately 10% of the population depended on the fishery for their livelihood (Quaatey, 1996). It seems that that number has declined in recent years. I recall seeing estimates exceeding 30% for the amount of protein in the Ghanaian diet that came from the sea.


Climatic fluctuations over the past fifty years are reflected in the catches of artisanal fishermen (Minta, 2003), but it is not as clear whether the more or less monotonic decline in fish catches over the past decades can entirely be laid at the feet of climate change. Different species respond in different ways to climatic fluctuations--the most important being temperature, rainfall, and strength and duration of upwelling. But against climate change we need to consider the backdrop of changing technology in both the artisanal and mechanized fishing fleets.

In 1996, when I began work in coastal Ghana, I saw significant fishing fleets at many villages along the coast. In particular, the village of Nakwa, at the mouth of the Nakwa River, behind a lagoon fronted by an impressive sand barrier, had a large fishing fleet full of vessels at least sixty feet in length which landed on the barrier. The fishing boats were brightly painted and festooned with colourful banners. There were ferries constantly running across the lagoon between the village and the landing ground for the fishing fleet.

Two years ago I ran a sidescan sonar survey out of Nakwa between the river mouth and the offshore oil platform (GNPC-Saltpond). The fishing fleet was gone, but for a couple of dilapidated wrecks drawn up on shore. The locals told me there was no more fishing--anyone from the village who wanted to fish had to travel 150 km west to Axim, where the fishing was still good.

Nakwa lagoon in 2010.

Flaring gas near Saltpond.

In 1997, in the course of offshore work near Axim, we encountered the artisanal fishing fleet several km offshore at night. The canoes all used lights to lure the fish in where they could be netted. At the time, this was the most technologically sophisticated method of artisanal fishing. Since then, new technologies have been deployed, including underwater lights and the use of chemicals.

The use of technology by the artisanal fishing industry varies from locality to locality. In the far west of Ghana, there has been an attempt to manage the fishery by limiting certain methods (CRC), but such efforts are nearly always local.

This year (so it has been reported), the fishing has ceased off Axim, and the fishermen have been forced further west to Cote d'Ivoire.

Overshadowing the increased efforts of the artisanal fishery is the steady increase in industrial fishing effort.

In 2010 I observed pair-trawling (which is illegal in most places). Sidescan surveys show that the seafloor is crossed by abundant trawl marks, even in nearshore areas that are supposed to be off-limits to such techniques. Trawling disturbs large areas of the seafloor, reducing marine productivity for years.

As the trawling has entered into the waters which were reserved for the artisanal fishermen, it is little surprise that the inshore fishery has suffered.


References


[CRC] Coastal Resources Center / Friends of the Nation (2011). Assessment of Critical Coastal Habitats of the Western Region, Ghana. Integrated Coastal and Fisheries Governance Initiative for the Western Region of Ghana. Coastal Resources Center, University of Rhode Island,132 pages.

Minta, S. O., 2003. An assessment of the vulnerability of Ghana's coastal artisanal fishery to climate change. M. Sc. thesis, University of Tromso, Norway.

Quaatey, S. N. K., 1996. Report on the synthesis of recent evaluations undertaken on the major fish stock in Ghanaian waters. Marine Fisheries Research Division, Fisheries Directorate of the Ministry of Food and Agriculture, Tema, Ghana.

Melcom building collapses in Achimota (Accra)

A six-story building collapsed in Accra today. It is the first time such a thing has ever happened.

The principal tenant of the building, occupying the lower three floors, was Melcom, a department/grocery store (think of something like Walmart).

Luckily the building collapsed before opening, otherwise there would have been hundreds of people trapped inside. As it is, about 55 employees were inside the building when it collapsed. One report says that 48 people have been removed from the ruins, with only five deaths. Furthermore, there are still people inside calling on cellphones asking for help and water, so it seems that the number of deaths will be much smaller than first assumed.

I've been watching images of it all day on one of the local channels. The building completely pancaked except for part of the ground level (or perhaps it was the basement). The concrete slabs of all of the remaining floors have all piled on top of one another, with the external support columns failing outward. It is as bad as any collapse I have seen after an earthquake. I would put it up there with Armenia (1988). It is still too early to be sure, but I would suspect faulty building materials (also the case in the Armenian earthquake).

The building was considered to be a fine example of a high-tech building. It was built in only two months, using new (to Ghana) construction techniques, but the reporting has been unclear as to the identity of the builder.

We have built a few small buildings ourselves in the course of our project here in Ghana. In general, the quality of available concrete block is very poor, with many block-makers using inadequate amounts of cement to bind together material that includes sticks, grass, leaves, and charcoal.

Block factory production in Weija (note sticks).

Wall in Weija made with low-quality block.

During today's coverage, the reporters revealed that Accra is in an earthquake zone, and cast doubt as to whether many of the modern buildings recently constructed have been built to a standard suitable for one. Furthermore, the same company that built the collapsed building has also built buildings in downtown Accra, which is making some people nervous.

Update Nov. 8 6:40 p.m. local

They are now saying 69 people have been rescued alive from the collapsed building, along with eight deceased.

An Israeli rescue team has arrived with sniffer dogs and various listening/looking devices to look for more survivors.

The owner of the building has been asked to turn himself in (but has not taken up the offer--no surprise there).

I had avoided comments on the age of the building in the original post, as there was too much conflicting information, with some sources saying the building had been recently completed in only two months, while the tenant claimed to have rented the building for ten years. It seems that the tenant has rented the building for ten years, but recently had three floors added to it--this new construction was done in only two months.

Such a project would raise concerns in my mind. Given the nature of the ground conditions (laterite/sand)--was the original low-rise situated on a slab which was adequate for a two-story building but not a five-story one?

Update Nov. 9 evening

More struggles with power and internet. Joy News reports 75 rescued and 10 fatalities, but still numerous survivors known to be in the wreckage, some of whom have been communicating by cell phone.

Freudian slips on Aljazeera

Some observations on the election from a commentator on Aljazeera (on TV here in Accra).

"Clearly a majority of voting Americans felt that Barack Obama diseas . . . deserved a second term as President."

"Obama's victory was sealed as he won several key backwa . . . battleground states." 

Ghana needs power . . .

. . .  desperately.

Power was out all day yesterday. It came on around 7 in the evening for just over an hour, and went out again.

Ran down all the batteries so I was just starting to charge them when power went out for the second time.

Came on again late at night, but couldn't charge batteries due to heavy lightning (plugged-in things here tend to explode when lightning strikes).

Power is on again this morning, but for how long?



A recent publication (which bandwidth is too limited for me to find) states that Ghana will produce enough power to supply its needs by 2020. Given that this is a government paper, it is vitally important to investigate its premises.

The authors of these papers tend to adjust their model parameters to suit the desired output. Yes, I understand that power plants are being built, and it is reasonable to assume that their projected capacity will be met. I will also allow their assumption that they will build out the required transmission capabilities as well.

What I don't accept is their projection of future demand. The reason for this is that since the present demand cannot be met, it is certain that it is underestimated. Likewise, the rate of growth of demand tends to be similarly underestimated. For this reason I think that their projected demand in 2020 will fall far short of the real demand, meaning that episodic blackouts, brownouts, and power sharing will continue here far into the future.

A worrying data point . . .

. . . in the climate change debate.

West African climate is monsoonal. The rainy season here in Ghana runs from about March to November (with some fluctuation). In the middle of the rainy season is a short dry spell which is caused by the upwelling of cold waters in July and August. This upwelling is a critical time for fish spawning as it leads to algal blooms. When the cold water rises to the surface, warm humid air offshore condenses and the rain falls on the sea.

Since my arrival I have noticed how cool it is here, especially by the coast. From the local fishermen, I have heard that the sea is unusually cold for this time of year, and the fishing is unusually good. It would seem that the upwelling which normally ends in August or at latest the first week in September has persisted now into the middle of October.

The upwelling means more algal blooms, which ought to be visible on NOAA imagery. I have always thought that the upwelling here was driven by south Atlantic winter storms--does anyone know if the Antarctic winter was unusual in this regard?

News from Ghana

Once again back in Ghana. The power goes off for a few hours every evening, although last night it went off and never came back.

Ghanaians like peace. They don't like war. They will argue loudly in public, but just when you think they are about to come to blows, they stop.

Ghanaians are watching the unfolding situation in Mali closely (I wrote a bit about this before).

Our housekeeper is telling us that Ghanaians are terrified the Islamists will move into Ghana once they have finished with Mali. She told us that everyone is praying that the Americans will come to intervene.

It's awfully convenient for America that two new oil-producing states are suddenly gripped with problems requiring their intervention. Especially when they were involved in the episode which led to the current unstable situation.

Sea ice photos from 1985

Here are some pictures taken from my summer on the ice. These illustrate to an extent what we mean by sea ice and multi-year ice.

Pack ice breaking up in June, 1985, Eureka Sound.

The blur at upper right is the Twin Otter propelor.

Thawing ice, Eureka Sound. There is a drainage hole in the middle foreground.

Most of the blue is freshwater sitting on top of ice. Most of the area in this photo

would be ice-free at some point in the summer (note icebergs in background).

Multi-year ice connected to Ice Island, May 1985.

Leaving town

Off to Ghana for the next while. As per usual, this will likely lead to a change in emphasis on stories here from North American/European to African.

Here's the view from the front of our office in Accra.

Update (Halloween):

Unfortunately the neighbours have cleared the lot including the trees where this clever fellow built numerous nests. Such is progress . . .

Wile E. Bernanke, Super Genius

Wile E. Bernanke has a tough job, fighting falling asset prices.

He looks like he should be opening an umbrella, just before the anvil lands on his head.

September Arctic sea ice chart buster

Further to this post, we append new measurements for September of 2011 and 2012 to the state space for Arctic sea ice.

I apologize for the cartoonish extension, but I can't find my original data file and don't want to recreate it just now.

Since the system broke out of the area of stability in 2004, there has been a rapid decline in September ice extent (September is normally the minimum for Arctic sea ice extent)--to what some observers believe will be a new zone of stability at approximately zero.

I'm an optimistic kind of guy. It looks like we may be forming a new zone of stability right around the values of the last three years, but need to stay here for several more years to be sure. And it is of some import to note that Antarctic sea ice has been increasing over the same period, so it may be we may be observing some kind of multi-decadal oscillation in sea ice volumes between the two hemispheres. As I've said before, we need more data.

A lesson for Al-Qaeda

The Mujahadeen-e-Khalq (MEK) is a militant group which participated in the overthrow of the Shah in 1979 as well as attacks against American targets prior to 1979. Subsequently they came into opposition with the Islamic government there, and carried out attacks until 2001.

The MEK is still recognized as a terrorist group in Canada. However it has recently been announced that this designation is going to be removed in the US. At least part of the reason for this change is that MEK is now working with Mossad to kill Iranian scientists. Additionally, the MEK has lobbyists working Congress and have paid for speeches by at least one ex-state governor.

As often happens, the lesson is there is a political path off the terror list that does not necessarily include renouncing terror.

The GS Trader

In response to this.

Once there was a GS Trader,
Who ordered o'er the intervader;
No, no, I mean a GS Get
Who tried to use the internet;
(Dear me, now I'm not quite
Sure if even now I've got it right).

Howe'er it was, he got his bid
Emplaced upon the intergrid,
The more he tried to get it filled
The harder crashed the interbuild.
(I think it's time to stop this rhyme,
Of HFT and micro-time).

-- with apologies to Ogden Nash

Why the Canadian political situation seems so familiar, part 2

Just to update the recent developments in Canadian politics since last time.

Today newspapers across Canada were abuzz with the news that Justin Trudeau, son of former PM Pierre Trudeau, has thrown his hat into the ring (no pun intended).

Justin Trudeau tries to take the majority government of Doom from Frodo. 

But Frodo won't surrender it, leading to tragedy.

As many feared, Stephen Harper managed to acquire the dreaded Majority Government of Doom.

Victory is mine! Two thumbs . . . err, one eye up!

And Michael Ignatieff suffered a devastating fall from grace.

Michael Ignatieff after the last election.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

I have been running this blog for a little over two years. When I started it, my focus was intended to be on methods of approaching interpretations of geological (primarily climatological) data. Somewhere along the line, the blog became more about economics/politics.

I have begun publishing the political/economic material on www.floatingpath.com, but will continue with the geological/mining/ industry/heavy mathematics here.

I have signed up for twitter and once I figure out how to link everything together, can keep anyone who wishes apprised of postings on either site.

If your interest has only been economic/political commentary, thanks for reading and I'll see you on the floating path. For everyone else, I'll see you over here or over there.

Japanese Financial Services Minister found dead, suicide suspected

This story has captured my imagination this morning.

The World Complex brings you a possible reconstruction of events leading up to the tragedy.

Image copyright Dave Sim. Text modified by The World Complex.

The gold standard according to David Olive

In this article, David Olive denigrates the Republican Party of the US (the GOP) not because of its warmongering, or its catering to Israel, or even its anti-(Mexican) immigrant bias. No, he attacks the GOP because it wants to bring back the gold standard.

The Republicans cannot be in favour of a gold standard (Ron Paul notwithstanding). The entire significant political establishment of the US is opposed to a gold standard. No politician can make a serious run at the leadership of either party and support a return to the gold standard. It can't happen. So put it out of your mind.

Ryan himself is too smart to speak of a revived gold standard, which suffers a lingering “barbaric” reputation among economists. In a recent poll cited by University of Chicago professor Richard Thayler, noted in the latest Atlantic, not one economist endorses a return to the gold standard.

The datum that "not one economist endorses a return to the gold standard" tells us much about the state of economics today. At the same time, considering the role that economists play in government finance, it is a message about the likelihood of a gold standard. There is none. For as long as the system holds.

For the rest of the article he recounts the tired old arguments against a gold standard that we have all seen before--its disastrous prevention of government intervention, its volatility, and its rarity. He tell us:

A return to the gold standard is wildly impractical. Requiring the Fed to hold gold in equal amount to currency outstanding would force it to set a fixed price at which it would exchange currency for gold. 

This is an obvious canard. As has been abundantly documented elsewhere, during the gold standard, neither the governments of the US nor Britain had anywhere near enough gold to cover all currency in circulation. Paper money was convertible, but the majority of people had no interest in such a conversion, provided they had confidence in the system.

It is much the same today. Paper money has value because people have faith in it. However, unlike a gold standard, if you suddenly lose faith in government's management of the economy, you have no real way to protect yourself. Perhaps you would exchange your national currency for some nice American currency? But then you have to have faith in the US government. Around the world, it is true, most people do. But such trust can end.

David Olive doubts that the Fed Governors would have the wisdom to set the gold price to the correct level. He writes:

Set the price too high, and monstrous inflation would result. Set it too low, and the result is the even greater catastrophe of deflation, the defining malaise of Japan’s 20-year-long economic stagnation. Just as one cannot time any financial market with precision, so it is with fixing gold at a price deemed ideal.

And yet he seems to have complete faith in the Fed's ability to set interest rates! Doesn't he wonder what happens if interest rates are set too high--or too low? If they can set interest rates, they can set a gold price--it's a political decision anyway.

As for volatility, the following chart (sourced here) shows us where price volatility really began.

Prior to about 1970 there are spikes in commodity prices related to wars and (in 1815, the "year without a summer") to natural disasters. It's true that after the WWII/Korean War spike, the price level did not decline. But since Nixon closed the gold window there has been no looking back.

Republicans in Tampa this week invoked cherished values of freedom, patriotism and self-reliance. But what they stand for is anarchism.

Well, after the last century with the murder of over 100 million people by their own or other governments, maybe it wouldn't hurt to consider something different.

Deep down I think Mr. Olive's problems with the gold standard comes from its thwarting of government's  authority. Under a gold standard, if the citizenry decided to take issue with government economic policy, they could send a strong message by converting their currency to gold.

The authoritarians intent on forcing democracy on the rest of the world want these populations captive to their governments--and a gold standard, which would give citizens power over their governments, has no role in this world. 

Emergence in biologic systems, example 2

My wife has been complaining about raccoons making a mess out in the garden. I think they've noticed. Today one of them left a present--a heart-shaped Lindt chocolate still (mostly) in the wrapper. With only a minimum of tooth/claw marks.

Waiting on the A-hole in J-hole

The idea for this title comes from here.

Looking for some action in the state space diagram for the gold-silver ratio.

We have been drawing the hook at the bottom of the graph for the past several months.

To look at how recent actions by the Fed might have influenced the gold-silver ratio, let's look at only the past few years of data.

Here we are looking at the evolution of the system over the past four years or so, from the trough in silver in late 2008. Remember that the vertical axis is lagged by a year, so, change in the vertical direction is a reflection of things that happened a year previously.

On this graph QE1 occurred right around the time when the gold-silver ratio stopped rising and began to decline. So it may have reversed the decline of silver. The spike in silver price (collapse in gold/silver ratio) at the far left of the graph occurred during QE2. So arguably, both QE1 and QE2 were relatively favourable for silver.

Operation Twist has had basically no effect on the gold-silver ratio (the vertical motion is a reflection of last year's fireworks). To see an effect by QE3 we would look for a large deflection to the left or right in the trajectory of our state space.

I can also attest a similar effect in diamond prices. Both QE1 and QE2 corresponded to significant increases in diamond prices. We have not had the same effect from Operation Twist (harder to graph as the specific diamond index data is no longer freely available).

We await the announcement coming tomorrow from Jackson's Hole. It is unclear whether there will be any substantial QE--what they have been doing through Operation Twist seems to have gotten the CBs what they want--some higher asset prices, but not commodities. For this reason, I wouldn't expect any announcement but either more of the same, or some kind of jawboning.

The True American Show

A nice movie depicting a long-running TV series starring True American as himself; written and conceived by the CFR.

True American is an everyman, living in what appears to be paradise. Here, surrounded by eternally smiling neighbours, the news is always good (except when it comes from any part of the world that isn't America). He and his neighbours' sunny reactions to news of the various American armed interventions around the world is secured by their knowledge that everything is as it should be; for they have liberal, democratic values.

"The Iraqis don't mind the constant drone attacks--they know we have their best interests at heart!"

"They only hate us for our freedoms!"

He is constantly reassured that he is living in the finest place on earth.

The rest of the world is a real hellhole!

Unknown to True American, however, his entire world is a fabrication, in a man-made bubble, sealed off from the chaos of the real world. The masterful choreographer of his world is a mysterious man (Rupert) who manages True American's perception of the world--but from time to time, little portions of the truth manage to slip past our hero's formidable defenses.

Here falling interest rates (just before they hit zero) are not accompanied by lower unemployment.

"You've got to listen to me! This isn't the real world! The rest of the world views American foreign policy as naked aggression! They don't hate us for our freedoms--they hate us for what we've done to them!" -- "Okay, let's have falafel instead of pizza then!"

True American is flabbergasted by these tiny glimpses of the truth--but each time, Rupert (through various surrogates) is able to calm him down with a reasonable explanation.

"Well, of course unemployment didn't fall. The economy in the rest of the world is too weak! If not for the European sovereign debt crisis (see newspaper headline) our economic models would work perfectly!"

"I'm sorry--she's completely crazy! A conspiracy theorist! Always going on about black helicopters, Ron Paul, and 9-11! Don't worry--it's not your fault. She's sick!"

His best friend is always ready to drop by with a six-pack of beer and reassurances.

Friends don't let friends think and drive.

Foreign policy issues are always carefully framed to include insignificant differences to create the illusion of meaningful debate.

"We should continue with our policy of sanctions on Iran, and only resort to bombing if they continue in their intrasigence." -- "I respectfully disagree. We should bomb them immediately, and if they continue resisting world opinion, follow up with continued sanctions."

Eventually the truth crashes through True American's defences.

Fox News assured me that nuclear power was safe!

Stumbling on another bit of the truth.

This time the hurried cover-up is to no avail.

Confronting the truth is painful.

But Rupert's control of reality is too strong. Facing the truth is painful--very much so. Far easier to avoid the truth. Especially when the Superbowl (or the Kardashians) is on TV.

"You'd feel better if you'd just kick back and watch the game with me. Have another beer!"

Viewers of the show can call in and talk to Rupert about the show. A common question is why True American is unable to see beyond Rupert's illusions.

"We accept the world as it is presented to us. If True American really wished to discover the truth, I would be unable to prevent him from doing so. But he is much happier in my artificial world than he would be in the real world. Since there are so many painful consequences to seeking the truth, he quite rightly prefers to live in my artificial world."

And so, True American is never able to escape his prison. (What, you thought he did? You must be thinking of another movie).

All photos copyrighted by Paramount Pictures

Autoritärenerdammerung!

A recent article discusses an old document (the "Report from Iron Mountain") supposedly written by a committee of academics, explaining why war was necessary as an organizing principle of society. Supposedly these academics decided that if warfare didn't exist it would either have to be invented, or some replacement found. Numerous suggestions are made (the report can be found here).

The report finds difficulties in worldwide disarmament. The problem reiterates an old economic fallacy, which I am certain has been exploded by Bastiat previously. The pamphlet assumes that if there is no longer demand for weapons, missile systems, and the like, then all the poor employees of the companies that make such products will have to be retrained and put to work in some other (centrally planned enterprise) - suggestions included (but were not restricted to): 1) a worldwide program to improve human welfare; 2) endless space exploration; 3) a minutely detailed program of disarmament with forced inspections; 4) the creation of an omniscient, omnipotent global police force; 5) a desperate program to reverse global environmental catastrophe. Other options were offered as well.

I can see why this document is viewed as a hoax. Why replace our economic model of endless warfare with these alternates when we can have the endless war and the alternates?

The real problem with this document (and what gives it the whiff of truth in my opinion) is that it assumes an authoritarian framework. This premise is never stated, but it permeates the entire work. The document never considers that people might be able to make decisions on their own. Instead, the document would have us believe that war is a force gives us meaning.

Is it natural that war be a central organizing force, or is this a conclusion that has been forced upon us by our "betters"?

The trouble with authoritarians is that they believe that they can make any part of our human or cultural systems reflect the "reality" that they create. For instance--as covered in this blog before--Keynesian economics suggests that low interest rates automatically lower the unemployment rate. Empirical observations indicate that such is not the case, yet the Keynesians continue to set economic policy in accordance with their flawed assumptions. Such pig-headedness is akin to a physicist claiming that gravity could be made to fall off with the cube of the distance, given sufficient funding, and that the benefits of the new result would more than justify the costs.

In a free society, capital which was no longer being used to build complex weapon systems would be used for other purposes, as directed and desired by customers. I don't know, and probably can't imagine how the capital would be used, but that isn't actually necessary as it is better for the economy if I don't try to direct it. That is the key point missed by the authors. The capital would be used. It isn't necessary to direct it.

I frequently get a sense of frustration from the writings of some of these economists when they fret about the suboptimal strategy of, say, handmaking furniture as opposed to churning out by the container load out of some factory. The argument is about efficiency, and survival of the fittest. However, one of the things that we observe from nature is that all sorts of critters pursue what appear to our eyes to be suboptimal strategies--but here they are. They have persisted to the present day because their survival strategies are optimal when the environment is different than it is today.

Nature thrives from diversity. Diversity is what gives nature strength and ecosystems their resilience. Despite numerous attempts, we have not succeeded in creating a stable biosphere. Our limited understanding suggests that a functioning biosphere needs a lot of different types of plants and animals, and the more different types, the more stable it is likely to be.

Part of the stability is due to the presence of the suboptimal organisms, some of which really shine when climate suddenly changes, or lots of volcanoes erupt and make the sea acidic.

If autonomous political systems were organized along the same lines as natural systems, there would be a range of sizes from very small to very large. The organization on a global scale is not natural--it is shaped by a historical reality that large political entities have a military advantage over smaller ones--France and Spain vs Italian city-states, for example. The authoritarian vision appears to be to create a larger political union still.

But the end is coming for them. We have entered the twilight of their vision. It is the same fear that motivates the Report from Iron Mountain. The system is too complex to be controlled. Back then the authorities said they feared chaos breaking out over the necessary changes to the economy that would follow from a transition to perpetual peace. In reality they feared the loss of control.

The potential for the loss of control is magnified by the aspirations of billions of people, who can now contact one another directly free of authoritarian oversight. The authoritarians cannot control the future.

Instead they must accept there is nothing to do but watch it unfold.

Like this . . .

USGS releases Afghanistan mineral maps

From the news release:

For the first time, about 70 percent of a country has been mapped using an advanced remote sensing technique known as hyperspectral imaging. In order to assist Afghanistan in understanding their abundant natural resources, in particular the development of an economically viable minerals market, the U.S. Geological Survey and the Department of Defense Task Force for Business and Stability Operations led an effort to fully map Afghanistan with hyperspectral data. 

Airborne hyperspectral sensors measure light reflected from the earth. The spectrum of the reflected light can be interpreted to identify the composition of materials at the surface, such as minerals, man-made materials, snow, and vegetation. These materials can be identified remotely due to their unique light spectra.  In addition, these data allow large geographic areas to be mapped quickly and accurately, showing mineral resources, natural hazards, agricultural conditions and infrastructure development. 

The project was funded by the Task Force for Business and Stability Operations, the Office of the Secretary of Defense, and the Afghan Government. The TFBSO is a Department of Defense organization that promotes stability and security in Afghanistan by developing growth of the private sector.  The Task Force has been working closely with the Afghan Ministry of Mines to assist in identifying and tendering major mineral deposits to international mining companies.

Yes, assisting the Afghans in "understanding their abundant natural resources" is a noble and selfless task which will no doubt be of great economic benefit. Whose benefit is never stated.

Links to the maps can be found here at the bottom of the page.

The Task Force for Business and Stability Operations (which partnered with the USGS on this) is one I had never heard of, but is a logical outgrowth of US foreign policy.

Gold ads what?

These ads have been running off and on now for a couple of years.

I only just noticed something strange. It looks like you can buy these with credit. I don't know anyone who extends credit for gold. It seems to me that the government is the only entity that could "afford" to do such a thing. Is this a venue for getting gold into the hands of the public? Does the US want to sell of "its" gold before its creditors claim it?

Update - how about that? Without a title, I couldn't look at the comments.

Innovation--the new catastrophe

In previous articles I have discussed how global climate (and other systems) may evolve rapidly from one condition to another.

In describing the transition from one state to another I have been using a statistical computational method akin to Markov chains to create a descriptive finite state machine (which I have previously referred to as epsilon machines).

Finite state machines normally consider that there is some sort of impulse or input which drives the transition, and the exact value of the input controls defines which particular successor state follows from a predictive state. For systems like global climate, we do not know what the external forcing, so we cannot create a matrix showing the dependence of state transitions on the forcing. Instead I have calculated the probability of each successor state following a predictive state purely from the observed sequence of states.

For instance, in the chart above, from state A3, the system shifts to A1 20% of the time, to A2 20% of the time, and to A4 60% of the time. Perhaps there were five observed transitions from state A3. The probabilities have been computed on the basis of a single predictive state. There is an argument that the evolution of the system is a function of the entire past history, suggesting we should really consider more than one sequential state for prediction. I have not done this because there are not enough transitions to determine such a matrix.

Conventional thinking is that a state change is driven by some external forcing. I have generally assumed that this is not the case, but that the observed discontinuities arise from a smooth evolution of one or more underlying parameters. Such discontinuities can be referred to as catastrophes.

Today's discussion is a reflection on catastrophe-- in particular, how a system governed by gradual, continuous changes in key parameters can bring about the appearance of sudden, discontinuous change.

One way to visualize how slow, continuous change can bring about a discontinuous response is through the use of a quartic function. In this case, we will use y = x^4 - 1.5 x^2 + a (x - 0.5) + 1. A family of such curves is presented below, for values of a ranging from -1.2 to 1.6.

The general form of the curve is two wells separated by one high point. Place a yellow marble in the right well (with a = -1.2), and consider its position as a gradually varies from -1.2 to 1.6.

At some point, (it is difficult to tell just when, visually), the well at the right will disappear, and the marble will roll down into the well at the left. We can calculate for which value of a this occurs. At each of the minimum and maximum points, the first derivative of the function is zero. The derivative of the expression above is:

y' = 4 x^3 - 3 x + a

We can see by inspection that when a = 1, two solutions degrade into one (at x = 0.5). This point is an inflection point, neither a maximum nor a minimum.

The position of the ball suddenly changes from 0.7 to -1 at a = 1.

The well on the left disappears at a = -1, so if we ran the experiment in reverse, we would see the jump at a = -1. This phenomenon is known as hysteresis. We would describe the change above as irreversible, as restoring the condition of the system to just before the discontinuity does not reverse the change.

If we studied some system with the above behaviour, conventional thinking would have some large input right at around a = 1. In reality, as we see, the jump happens when the system passes the tipping point.

Does climate behave like the mathematical function described above? There is growing agreement that it does, however the probability of such an event in our near future cannot realistically be assessed (Livina's comments to the contrary on page 8 of the linked pdf). 

I like the title

Los Angeles California's Incentive Programs for Large and Small Solar Systems

The rest of the article was a bit of a disappointment.

Induction, deduction, and the Newtonian paradigm, part 1

When I was in grad school, I had a roommate who was studying philosophy. One day he decided that he would no longer accept any conclusions that came from inductive reasoning, as deductive reasoning was superior. It was not long before he was refusing to accept premises like the sun would rise on the morrow, or  that he would have to eat the next day, saying that just because these things happened in the past, we could not conclude they would continue to happen in the future.

Most of what we imagine we know about the world was arrived at through inductive reasoning. From a scientific perspective, my ex-roommate's decision was catastrophic. In reality, however, it was probably no different from the way most people live their lives. He went out looking for food when he was hungry (I never investigated how he deduced where to find food). He avoided being run over by cars or starving to death, at least as long as I knew him. In a modern society, planning for future events like becoming hungry isn't really necessary--although whether he would have been as successful in the distant past is an open question.

Mathematics is deductive--this works because mathematics has little to do with the real world. You've never seen a triangle with internal angles adding up to 180 degrees. But mathematics was one of the first tools used to study the real world, so it is no surprise that early sciences proceeded on the basis of a modified form of deduction.

Deduction works on the basis of axioms--which are irreducible, true statements (at least within some sort of formal system)--and rules of inference, which allow us to generate more true statements from our axioms. These new true statements so generated are called theorems. An example of an axiom might be "all right angles are congruent". An example of a rule of inference might be "things that are equal to the same are equal to each other".

In the early days of geology, for instance, there were constant conflicts between different "schools"--for example, the Neptunists and the Plutonists. The schools were framed by their various axioms; which in the case of the Neptunists were that all rocks formed by the lithification of sediments in water, as compared with the Plutonists who believed that all rocks formed from crystallization of magma. These axioms shaped the thinking of geologists from the respective schools so much that geologists from different schools could look at the same rocks and interpret them differently. Discussions between geologists of the two schools must have been as exciting as those between the Montagues and  the Capulets (Romeo and Juliet notwithstanding).

The first revolution in science was to change its basis of operation from deductive to inductive. Central to this was the idea of formulating testable hypotheses. Although there has been a major improvement in our understanding due to the notion of testing hypotheses, something that can be overlooked is the general framework which limits the hypotheses we choose to test (and influences our approach to developing new hypotheses). This framework has been described elsewhere as a paradigm.

A paradigm is an overarching set of preconditions generally accepted by practitioners at a particular time. In one sense, it is not that different from having a set of axioms underlying your school--the one difference is that in principle, the paradigm is falsifiable, and so may be discarded should a better one come along. In reality, too many scientists have too much at stake to allow any paradigm to fall without a major struggle.

The next big debate in geology was between Catastrophism and Uniformitarianism, the central tenet of which is that the processes acting on the earth are consistent, for the reason that the laws of chemistry and physics do not change with time. The uniformitarian concept was of an ancient earth, which changes happening gradually over unimaginably long periods of time.

We can imagine Hutton, drawing on his father's experience as a lawyer, summarizing his arguments and presenting them logically as follows:

". . .as illustration of my views of those principles, and as evidece strengthening the system necessarily arising out of the admission of such principles, which . . . are neither more nor less than that no causes whatever have from the earliest time to which we can look back, to the present, ever acted, but those now acting; and that they never acted with different degrees of energy from that which they now exert." (15 Jan 1829, letter to Murchison).

Once the idea of uniformitarianism took hold, it proved to be nearly as restrictive as either the Plutonists' or Neptunists' schools. Even though geology advanced by testable hypotheses, the prevailing paradigm placed limits on the kind of hypotheses that could or would be tested. The last portion of his quote is the problem--that the forces of nature have never acted with degrees of energy greater than they do at present. That means that there were no storms greater than any we have witnessed, nor volcanic eruptions, nor earthquakes. The problems with this are well understood in the present day, but were the focus of intense debate in Hutton's time.

Hutton's intellectual opponents drew on different oratorial backgrounds. We can picture Adam Sedgwick, a Minister, thundering from the pulpit as follows:

"To assume, then, that . . . forces have not only been called into action at all times in the natural history of the earth, but also that in each period they have acted with equal intensity, seems to me a merely gratuitous hypothesis, unfounded on any of the great analogies of nature. . . This theory confounds the immutable and primary laws of matter with the mutable results arising from their irregular combination. It assumes, that in the laboratory of nature, no elements have ever been brought together which we ourselves have not seen combined; that no forces have been developed by their combination, of which we have not witnessed the effects. And what is this but to limit the riches of the kingdoms of nature by the poverty of our knowledge; and to surrender ourselves to a mischievous, but not uncommon philosophical scepticism, which makes us deny the reality of what we have not seen, and doubt the truth of what we do not perfectly comprehend."  (18 Feb 1831, address to the Geological Society).

The current view in geology is rather a combination of the two views, whereby catastrophes are part of the natural process of the world, and are therefore sprinkled throughout the geological record in conformance with the general principle of uniformitarianism. The debate as to whether or not catastrophic events are important in the geological record has been resolved in the affirmative.

The work I have presented over the course of the last year or so has a lot in common with the above Sedgwick quote. With the idea of innovation in earth (and other complex) systems is my attempt to not "limit the riches of nature to the poverty of our observations".

The epsilon machine approach to characterize the dynamics of the data set in a manner consistent with Occam's Razor is intended to be repeatable in a way that geological interpretation usually is not. It will still take time to establish whether this method is successful. The interpretation of the dynamics and exposition of its implications in terms of real earth dynamics may still vary from one geologist to another.

The Newtonian paradigm suggests that complex systems can be understood by detailed study of each of their components in isolation. Hypotheses are formulated and tested about each component, trusting that their combination would lead to a full understanding of nature. Testing multitudes of hypotheses, each of which leading to a small improvement in our knowledge, has built our current understanding of the world. The Newtonian approach has had the advantage over time, primarily because it is easier to formulate testable hypotheses.

Unfortunately, the Newtonian paradigm has its limits, and these limits have been visited in geological and biological systems. An understanding of complex systems still eludes us. But Newton had a rival, Leibniz, whose approach of viewing complex systems as essentially being characterized by information, or sets of rules which could in principle be determined from observation, as being complementary approaches. I will expand on this idea in a later posting.