The Bubbles Are Piling Up

It seems that a Kazakh bank might be the first one to collapse from losses that originated in the commodity bubble.

New York Times: The largest bank in the Central Asian nation of Kazakhstan, whose economy soared when oil prices were high, announced on Friday that it could no longer repay $11 billion in foreign debt.

The bank, BTA, said it would pay only interest to foreign creditors, who lavished the country with loans during the commodity boom. The move underscored the growing financial instability in countries all across the former Soviet Union.

[...]

BTA had been wobbly for some time. The Kazakh government partly nationalized the bank in February. That was taken as a sign that the bank’s debt might be covered by a sovereign guarantee, though even at the time government-appointed executives said they were studying ways to restructure foreign debt.

I have long been suspecting that the dangers of letting large banks fail have been much exaggerated, especially compared to the burden that is caused by governments picking up the tab. Hopefully the economy of Kazakhstan will not completely collapse.

The losses from the housing market and structured credit bubbles haven't been cleared. Yet we are already witnessing huge losses from the commodity bubble.

Since the 60's the US has seen an ever more rapid sequence of bubbles: conglomerates, junk bonds, real estate, tech stocks, housing, structured credit, commodities, and finally, government bonds. When the accumulation of foreign dollar reserves reverses itself, the government bond bubble will come to an end. That might actually be pretty close now.

It seems that the era of serial bubbles is ending in bubbles that are ever more short in duration, until they can no longer be “fixed” by creating a new one.

When looking at the whole trend, I can't help but to think that the biggest bubble of all has been of the standards of living in the developed world. Western standards of living were raised to unsustainable levels by relying on undercompensated use of colonial resources, until the 1960's. After the colonial period, a massive accumulation of debt has been used to delay the inevitable balancing of global consumption patterns. All the other bubbles are just minor manifestations of this all-enclosing bubble of debt.

Pain in the Fertilizer Supply Chain

Bad news on global agricultural output:

The Globe and Mail (Canada): Farmers across Canada, the United States and elsewhere are ... holding off on fertilizer purchases in the hope prices will fall. Their collective action has sent fertilizer sales into an unprecedented nosedive and pummelled the bottom lines of agriculture giants like Potash Corp. of Saskatchewan Inc., [POT-T]Viterra Inc., Bunge Ltd. and Terra Industries Inc.

[...]

Fertilizer dealers have been hit even harder and a few small stores in Canada have gone out of business.

"It's not good," said Bob McNaughton, who runs Sylvite Agri-Services Inc. in Putnam, Ont., which has six locations. He knows several stores that are facing financial trouble. "They're gone, or will be."

Many stores bought potash last year at close to $1,000 a tonne, he said. The price has fallen to around $800, which many still believe is too high. Even if a retailer can make a sale, Mr. McNaughton said the owners have to eat the loss.

"Everybody was expecting a mind-blowing, record fall season and it was a bust," said David MacKay, executive director of the Winnipeg-based Canadian Association of Agri-Retailers, which represents about 1,000 fertilizer dealers.

It seems that retailers will rather let their stockpiles lay still than sell at a heavy loss. I have a radical suggestion: If the producers want to see potash move in the market, they should accept that the super high prices of last fall were a mistake. They should make temporary offers of retrospective rebates to retailers, payable against retail sales, to encourage reductions in stockpiles.

Potash chief executive officer Bill Doyle said farmers are playing a "dangerous game" that will have consequences.

"This level of reduction has never been seen before," he told analysts on a conference call. "No one can state precisely what the impact will be on the world's food supply, immediately or over the longer term. But we know with scientific certainty that nutrient underapplication damages both crop yields and quality."

Mr. Doyle said farmers in Brazil and Argentina are already witnessing the fallout. They used far less fertilizer on their crops and are now seeing production yields fall by as much as 20 per cent.

He said fertilizer sales to North American farmers have dropped as much as 86 per cent but farmers still plan to plant the same amount of corn, canola and other crops as last year. If farmers around the world follow the same path, global food supplies will be affected. "After two record world crops in 2007 and 2008, the year 2009 could be a completely different story," he said.

No, it’s the potash producers who are playing a dangerous game by trying to leverage their oligopolistic market status to extract excessive profits at the expense of the whole population of the earth. Farmers don't have the money.

These kinds of “pile-ups” in the supply chain are an unfortunate side effect of unregulated speculation on essential commodities.

Tom Toles on Waterboarding Iraq–al Qaida “Links”

Tom Toles just got it:



False confessions flow naturally from torture. I think Tom just summed it up perfectly. It's a feature.

The Seducing Simplicity of Gaussian Models

This is a great illustration from Paul De Grauwe, Leonardo Iania and Pablo Rovira Kaltwasser of the dangers of using the wrong probability distributions in a statistical model. In eurointelligence.com (ht Yves Smith, emphasis is mine):

October 2008 was certainly a spectacular month in the stock markets. Large daily changes occurred that surprised most investors. Yet, although many investors had not seen such wild gyrations of stock prices for a long time, there was a general sense that this had happened before.

Those of us who studied modern finance theory, however, were truly astonished by the sheer improbability of the events occurring in the stock markets during that fateful month. One of the basic assumptions used in almost all our finance models is that returns are normally distributed. These models are widely used to price derivatives and other complex financial products. What do these models tell us about the probabilities of the events that occurred in October?

The following table gives an answer. We selected the six largest daily percentage changes in the Dow Jones Industrial Average during October, and asked the question of how frequent these changes occur assuming that, as is commonly done in finance models, these events are normally distributed. The results are truly astonishing. There were two daily changes of more than 10% during the month. With a standard deviation of daily changes of 1.032% (computed over the period 1971-2008) movements of such a magnitude can occur only once every 73 to 603 trillion billion years. Since our universe, according to most physicists, exists a mere 20 billion years we, finance theorists, would have had to wait for another trillion universes before one such change could be observed. Yet it happened twice during the same month. A truly miraculous event. The other four changes during the same month of October have a somewhat higher frequency, but surely we did not expect these to happen in our lifetimes.

Trying to explain these deviations as just a few outliers in an otherwise well-behaving Gaussian process just doesn't cut it. A simple visual comparison of these time series is enough:

Figure 1: Dow Jones Industrial Average 1928-2008

Figure 2: Random Normal Process

The “Tortuous” Search for Iraq-al Qaida Links

Jonathan S. Landay of McClatchy Newspapers drops a bomb:

The Bush administration applied relentless pressure on interrogators to use harsh methods on detainees in part to find evidence of cooperation between al Qaida and the late Iraqi dictator Saddam Hussein's regime, according to a former senior U.S. intelligence official and a former Army psychiatrist.

Such information would've provided a foundation for one of former President George W. Bush's main arguments for invading Iraq in 2003. In fact, no evidence has ever been found of operational ties between Osama bin Laden's terrorist network and Saddam's regime.

So detainees were tortured while trying to make them speak of a non-existing issue. So much for the ticking time bomb scenario. This gives whole new meaning to the original source for the title phrase of this blog. “Go massive” indeed.

Collateral Damage and Force Protection

Tom Engelhardt writes thoroughly in TomDispatch.com about the deaths of civilians in US operations in Afghanistan and the various approaches for handling the cases by the military brass.

Admittedly, there's been a change in the assertion/repeated denial/investigation pattern instituted by American forces. Now, assertion and denial are sometimes followed relatively quickly by acknowledgement, apology, and payment. Now, when the irrefutable meets the unchallengeable, American spokespeople tend to own up to it. Yep, we killed them. Yep, they were women and kids. Nope, they had, as far as we know, nothing to do with terrorism. Yep, it was our fault and we'll pony up for our mistake.

This new tactic is a response to rising Afghan outrage over the repeated killing of civilians in U.S. raids and air strikes. But like the denials and the investigations, this, too, is intended to make everything go away, while our war itself -- those missiles loosed, those doors kicked down in the middle of the night -- just goes on.

[...]

But let's consider here just one recent incident that went almost uncovered in the U.S. media. According to an Agence France Presse account, in a raid in the eastern Afghan province of Khost, the U.S. military first reported a small success: four "armed militants" killed.

It took next to no time, however, for those four militants to morph into the family of an Afghan National Army artillery commander named Awal Khan. As it happened, Khan himself was on duty in another province at the time. According to the report, the tally of the slain, some of whom may have gone to the roof of their house to defend themselves against armed men they evidently believed to be robbers or bandits, included: Awal Khan's "schoolteacher wife, a 17-year-old daughter named Nadia, a 15-year-old son, Aimal, and his brother, who worked for a government department. Another daughter was wounded. After the shooting, the pregnant wife of Khan's cousin, who lived next door, went outside her home and was shot five times in the abdomen..."

[...]

All of this was little more than a shadow play against which the ongoing war continues to be relentlessly prosecuted. In Afghanistan (and increasingly in Pakistan), civilian deaths are inseparable from this war. Though they may be referred to as "collateral damage," increasingly in all wars, and certainly in counterinsurgency campaigns involving air power, the killing of civilians lies at the heart of the matter, while the killing of soldiers might be thought of as the collateral activity.

Pretending that these "mistakes" will cease or be ameliorated as long as the war is being prosecuted is little short of folly. After all, "mistake" after "mistake" continues to be made. That first Afghan wedding party was obliterated in late December 2001 when an American air strike killed up to 110 Afghan revelers with only two survivors. The fifth one on record was blown away last year. And count on it, there will be a sixth.

[...]

Let's for a moment assume, however, that our safety really was, and remains, at stake in a war halfway across the planet. If so, let me ask you a question: What's your "safety" really worth? Are you truly willing to trade the lives of Awal Khan's family for a blanket guarantee of your safety -- and not just his family, but all those Afghan one-year olds, all those wedding parties that are -- yes, they really are -- going to be blown away in the years to come for you?

Tom correctly identifies the huge costs of trying to obtain maximum safety. Unfortunately he misses one important aspect of safety in war that plays a very important role in actually promoting the deaths of innocent civilians: force protection.

Force protection has been put into a prime position in the list of priorities for the US military, ever since the mistaken perception that the Vietnam War was lost for the loss of morale at home. Troops are trained to shoot first and ask questions later to avoid potentially hazardous situations that could be triggered by the extra few seconds or minutes that would be needed to adequately asses the threat. This is well highlighted by the case of the cousin of Awal Khan mentioned in the quote above. She most probably received five bullets in the abdomen “just in case”, simply to protect the US troops involved from even theoretical risks.

Overreliance on air power is the most awful measure of force protection. Air raids are safe for the military, but disastrous for the civilian population in anti-insurgency warfare.

This is simply wrong. Soldiers should be bearing the risks to protect the civilian population, not engaging in reckless endangerment and voluntary manslaughter on a massive scale. In this case, it is not even a case of enemy civilians, but the very civilians that the soldiers are supposed to be protecting.

Giving the safety of soldiers priority above that of the civilian population is not only wrong, but stupid as well. It unnecessarily enrages the population and enhances the popularity of the insurgency. If US soldiers are not ready to risk their lives in protecting foreign nationals, they should not engage in wars of “liberation” in the first place.

See also my post from October 2007: “Human Terrain Teams and Dehumanization of Civilians”.