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Thursday, March 27, 2008

Investing: Including gold in a portfolio

In the previous gnome-o-gram I discussed the function of gold, not as a speculative investment, but as the foundation of a portfolio: the only asset upon which you can rely to retain its intrinsic value regardless of whatever may happen, at least as long as forty centuries of human history is predictive of future events.

This article is addressed to those who have decided to include gold in their portfolios and are now presented with the choice of one or more alternative means of doing so. In the following discussion I explicitly eschew all questions of tax treatment and the possible legality of various options in different jurisdictions: such matters vary all over the place depending upon where you live, and any such questions must be addressed to an expert familiar with the conditions that apply to each individual investor. Regarding taxes, however, keep in mind that we're talking about a disaster hedge foundational asset which you are not going to trade, only buy and possibly add to over time. The only circumstances in which you'll consider liquidating it (except perhaps when moving to a more income-oriented strategy at retirement) would be in times of financial crisis where the value of your other assets has cratered, and in such circumstances taxes are probably going to be pretty low on your list of priorities. If you live in a jurisdiction which imposes a “fortune”, “wealth”, or “capital” tax on assets you own, you should include this among other costs (for example, storage and insurance fees) when deciding how much gold to hold.

Let's start by excluding a form of investment which is completely unsuitable as a disaster hedge foundation: shares in gold mining companies. When U.S. citizens were forbidden to own physical gold (between 1933 and 1974), gold stocks were a legal work-around, as appreciation in the price of gold will generally cause their value to appreciate, both along with their assets in the ground and earnings from sales of the gold they mine. In addition, mines with a high cost of production can benefit from inherent leverage, behaving more like a call option with strike price at their cost of production rather than a zero-based asset. If you have no idea what I just said, don't worry about it, because all you need to know about gold stocks is that they're stocks, and they can go up and down for many reasons unrelated to the price of gold: the mine can cave in, they may discover a new vein of gold on their property or a previous “discovery” may prove to be smaller than estimated, or management can make mistakes in over- or under-investing in production which prove disastrous based on the price of gold in the future. In short, as with any stock, you're buying into a business whose share price depends upon its success or failure, of which the price of gold is only one among numerous contributors. Gold stocks (or diversified funds which hold them) can be an excellent vehicle for speculating in gold, but they are no substitute for the real thing as a foundation for your portfolio and refuge in times of financial peril.

All of the alternatives discussed below are various ways to actually own physical gold. But since this is the twenty-first century, there are different degrees of abstraction involved, and while they make little difference as long as the economy and financial system continue to function normally, they may make all the difference in case of crises. But crises are precisely why you own gold in the first place! So in weighing the various options, it's important to ponder just how bad you think things may get, and make your choices with the intent to preserving your wealth and options in a worst plausible case scenario.

Absent worries about disruptions in the financial system or political risks, the obvious way to own gold would be as shares of the SPDR Gold Shares exchange traded fund, which trades on the New York Stock Exchange (NYSE) under the symbol GLD. Each share represents a beneficial interest in 1/10 troy ounce of gold, and may be expected to closely track the price of gold quoted in U.S. dollars (discounted for storage, insurance, and operating expenses of the fund). Shares of the fund are backed by physical 400 ounce gold bars held in the London vaults of HSBC Bank, with a small fraction of the asset value in short-term cash instruments to buffer sales and redemptions of the fund. Given the listing requirements of the NYSE, regular audits, and centuries of safekeeping of assets in the vaults of London banks, this is about as safe a paper instrument representing gold as one can imagine. Because it is a stock listed on the NYSE, you can buy it through your regular stockbroker, include it in self-directed pension plans, and manage it like any other investment.

So what's the downside? Well, as long as your stockbroker or other financial institution which holds the shares on your behalf, the NYSE which allows you to sell them, the manager of the fund, and the bank in London which holds the physical gold all remain solvent and operational, and no government between you and your beneficially owned gold imposes exchange controls, limits upon capital transfers, or confiscation and/or forced conversion of certain asset classes, there isn't any. But again, it's precisely these kinds of things, among others, which motivate the prudent investor to devote a part of their portfolio to gold in the first place. So while GLD is a convenient instrument for owning gold, if you really worry about “what if?” (and you should), then there are other, more cumbersome alternatives worth considering.

(There is a PayPal-like Internet service called e-gold which allows you to exchange currencies for beneficially owned gold, silver, platinum, and palladium bullion held in storage. This enterprise is headquartered in the West Indies island of Nevis, and has been in operation since 1996. I would consider it an alternative Internet payment system but not a store of value for investment purposes, as it lacks the scrutiny and transparency of a fund traded on the NYSE. I am an e-gold customer, but I use it to make payments, not to store post-apocalypse funds—it's an Internet service—suppose there's no Internet. E-gold, like any other instrument which attempts to avoid the fine-grained scrutiny of governments and reliance upon their paper money, has been the subject of regulatory attacks. See this article for current information, keeping in mind the collectivist inclinations of many contributors to this site.)

We're working our way up the wall of worry here. As I've mentioned, there are a number of parts of the global financial system as we know it which have to be working in order to sell shares in GLD and turn them into something you can use to buy the necessities of life, should it come to that. Risks include the closing of the NYSE on which it is traded (not only was the NYSE closed for six days after the September 11th attacks of 2001, it was closed for four months following the outbreak of World War I in 1914). Further, suppose the government of the country in which you're living up and forbids its citizens to own gold, confiscates any gold they own (including sealing their safe deposit boxes, only to be opened with a government agent in attendance to appropriate any gold they contain), to be replaced by paper money at an arbitrarily specified price, doubtless to be adjusted after the confiscation was complete, at the expense of those who attempted to protect themselves by owning gold. “Paranoid! It can't happen here!”, they say. But for readers who live in the United States, it did happen there: on April 5th, 1933, with no warning whatsoever and without an act of Congress, U.S. President Franklin D. Roosevelt, relying upon a “Trading with the Enemy Act” enacted in 1917, via Executive Order 6102 seized all gold (apart from a few minor exceptions) belonging to U.S. citizens, compensating them with paper dollars at the rate of USD20.67 per ounce. Shortly thereafter, the dollar was devalued with respect to gold to an exchange rate of USD35/ounce, a loss of 41% for any holder of gold before the seizure. U.S. citizens were prohibited from owning gold until December 31st, 1974. If it can happen there, it can happen anywhere, and if it happened then, it can happen now. The prudent investor should bear this in mind when weighing convenience against risk avoidance.

The first firewall one might consider erecting against such calamities is keeping your gold holdings in a different country than that in which you live. This is an excellent idea, as long as the other country is one which is less likely to seize your assets than your own, and is not beholden to it to such an extent that it's likely to enforce your country's strictures against citizens with accounts in that country's banks. Now, that's a heck of a sentence, isn't it? Dude, we're talking about Switzerland. Switzerland has never lost a war in the last seven centuries through the time-tested expedient of never getting into one, and has an unparalleled record of preserving the assets of those who entrust them to Swiss banks across financial and political convulsions which pauperise those who left their assets at home. This is a morally neutral thing: asset preservation means that it works for the bad guys as well as the good guys, but since we're good guys interested in preserving our own assets, we should look at the effectiveness and safety, not at whose name may be on the adjacent box in the vault.

It may seem exotic to have a Swiss bank account, but it couldn't be easier to open one, or to use one to bank by mail or over the Internet. The details of working with Swiss banks are another topic which I may address later, but basically if you write to any major Swiss bank in any language and ask about depositing money there, you will get a letter back in your own language with all of the details. Once you have your account, you can easily make deposits in any currency you wish, buy and sell any stocks, commodities, or any other financial instrument on the planet, or anything else. But let's get back to gold—it always comes back to gold.

There are two principal ways of purchasing gold through a Swiss bank: a metal account, or in segregated storage. A metal account is much like purchasing shares of GLD: you buy a beneficial interest in physical gold stored in the vault of one of the big Swiss banks, and your account is credited with that ownership. As long as the big bank remains in operation, and the bank holding your account is able to process transactions, you can sell your gold for whatever currency you wish. Your only worry is that something may break down which disrupts the record of your beneficial ownership or obstructs your ability to sell it.

If you're worried about that eventuality, you can consider buying gold in segregated storage. In this case, you buy some quantity of gold (depending upon the bank, this may be as small as a single gold coin, or as large as a kilogram bar, which ain't cheap), which is physically stored in the bank's vault (or the vault of a correspondent bank [if this matters to you, ask them]), tagged with your name, and kept in your account. Your account will be charged with storage and insurance fees for this asset. What you get for this extra cost is that, under Swiss law, your gold in the vault is in no way commingled with the assets of the bank. If worst comes to worst, you can walk up to the front door of the bank with your wheelbarrow and say “Ah want ma' gold”, and by law they have to give it to you, and experience says they will. After that, it's up to you to protect it from the hordes of flesh-devouring mutant zombie vampires, but I'm not going there, at least for the moment—maybe after the U.S. elections.

Finally, suppose you've looked at all of the alternatives enumerated above and can see the security holes lurking in them all. What if you insist that your ultimate, “whatever happens”, store of wealth be insulated from any and all intermediaries? How can you own your financial foundation outright without any paper between you and your last-ditch assets? Well, that means actually owning gold—the shiny yellow metalphysically, in your own money bin. That's easy, but also complicated: let's explore the considerations. If you want to buy physical gold, the easiest way is to go to your nearest coin shop (or bank, if you live in Switzerland or other countries where banks understand gold) and purchase gold bullion coins such as the Canadian Maple Leaf or American Eagle coins, which are available with gold content from 1/10 to one troy ounce (the gold in some of these coins is alloyed with other metals in the interest of durability—bullion coins contain the stated weight of the precious metal, not including the other components of the alloy).

So here, at last, is really owning gold! You walk into the coin shop with a wad of paper money, and out you walk with a few coins in your pocket which have about the same purchasing power as they did in the agora in the days of Pericles. What could possibly go wrong? Gnomes exist to point out these things, so let's start with the obvious: somebody could pick your pocket, and then you're out whatever you've spent on the coins. If you get home, then you have to worry about burglars. If you take them to the bank and put them in your safe deposit box, you may fret about a bank holiday blocking your access to that box, or your having to open it in the presence of a revenuer charged with seizing your “hoard” for the common good and compensating you with freshly-printed paper money with no intrinsic value whatsoever, and devalued shortly thereafter.

I'm not trying to induce unwarranted fear here, just to observe that when you're deciding how to handle that small part of your retirement and survival funds upon which you may have to rely if everything else goes south, you should bear in mind that south extends to the gates of Hell and beyond, into the ninth level of financial apocalypse, cross-defaults, breakdown of transaction-processing mechanisms, government intervention into markets and the abrogation of contractual obligations, and instability of valuation and inability to convert paper currencies, and that you might want to consider keeping around, say, three months' household expenditures in physical gold, ideally in the smallest (1/10 ounce) bullion coins, just in case it comes to that, or you need to use those funds to buy a ticket to wherever you've kept the rest of your assets out of the grasp of your own government.

As for protecting these last resort physical assets, I'm sure those who frequent this chronicle are at least as clever as I, and as ready and willing to employ both passive and active measures to that end.

In the next gnome-o-gram, I'll explain what “financial derivatives” are, and why you should be very, very worried about them, even if you've never before heard the phrase and don't own any such exotic financial products yourself.

Other gnome-o-grams

Posted at 21:03 Permalink

Monday, March 24, 2008

Reading List: Laika

Abadzis, Nick. Laika. New York: First Second, 2007. ISBN 978-1-59643-101-0.
The first living creature to orbit the Earth (apart, perhaps, from bacterial stowaways aboard Sputnik 1) was a tough, even-tempered, former stray dog from the streets of Moscow, named Kudryavka (Little Curly), who was renamed Laika (Barker) shortly before being sent on a one-way mission largely motivated by propaganda concerns and with only the most rudimentary biomedical monitoring in a slapdash capsule thrown together in less than a month.

This comic book (or graphic novel, if you prefer) tells the story through parallel narratives of the lives of Sergei Korolev, a former inmate of Stalin's gulag in Siberia who rose to be Chief Designer of the Soviet space program, and Kudryavka, a female part-Samoyed stray who was captured and consigned to the animal research section of the Soviet Institute of Aviation Medicine (IMBP). While obviously part of the story is fictionalised, for example Kudryavka's origin and life on the street, those parts of the narrative which are recorded in history are presented with scrupulous attention to detail. The author goes so far as to show the Moon in the correct phase in events whose dates are known precisely (although he does admit frankly to playing fast and loose with the time of moonrise and moonset for dramatic effect). This is a story of survival, destiny, ambition, love, trust, betrayal, empathy, cruelty, and politics, for which the graphic format works superbly—often telling the story entirely without words. For decades Soviet propaganda spread deception and confusion about Laika's fate. It was only in 2002 that Russian sources became available which revealed what actually happened, and the account here presents the contemporary consensus based upon that information.

Update: Reader Mark Ziemba writes to point out an excellent podcast by Clark Boyd (MP3) about Laika's mission, including interviews with author Nick Abadzis, space historian Von Hardesty, and Sergei Khrushchev, son of the Soviet premier and aerospace engineer in the Chelomei design bureau in the 1960s. This page has background on the podcast and excerpts from the interviews. There is one goof: the chimpanzee Ham did not orbit the Earth; his flight was a suborbital lob on a Redstone booster. The first chimp to orbit the Earth was Enos. (2008-03-29 20:28 UTC)

Posted at 22:49 Permalink

Sunday, March 23, 2008

White Easter 2008

Here is an image gallery of the great equinoctial snowstorm of 2008, including photos taken on March 21–23.

Posted at 20:49 Permalink

Saturday, March 22, 2008

Eight-legged karma: twenty years on

It was twenty years ago today,
that I blew off speaking in L.A.
Then I learned what I would have to pay,
and afterward I've said no way!
This critter, along with a dishwasher, a not insubstantial volume of arterial blood, Kleenex, Scotch Magic Tape, and a field surgery kit all played a part in this March 22nd, 1988 episode of Animal Magnetism.

arachno.jpg
Click the picture for details.

I may not be particularly talented at foreseeing the future (I'm more of a retro kind of guy), but I try to not make the same blunder more than once. Indeed, except for one incident which perhaps may be excused for having happened on Friday the thirteenth, I have never since missed a scheduled speaking engagement. I feel that old eight-eyes is watching me.

Posted at 14:23 Permalink

Friday, March 21, 2008

Spring is here!

Nobody told me Al Gore was going to be in town! I attribute it to ManBearPig.

Update:

meteo_2008-03-22.png

This is getting cereal! (2008-03-22 13:02 UTC)

Posted at 15:46 Permalink

Tuesday, March 18, 2008

Reading List: What's So Great About Christianity

D'Souza, Dinesh. What's So Great About Christianity. Washington: Regnery Publishing, 2007. ISBN 978-1-59698-517-9.
I would almost certainly never have picked up a book with this title had I not happened to listen to a podcast interview with the author last October. In it, he says that his goal in writing the book was to engage the contemporary intellectually militant atheists such as Richard Dawkins, Sam Harris, Christopher Hitchens, Daniel Dennett, and Victor Stenger on their own turf, mounting a rational argument in favour of faith in general and Christianity in particular, demonstrating that there are no serious incompatibilities between the Bible and scientific theories such as evolution and the big bang, debunking overblown accounts of wrongs perpetrated in the name of religion such as the crusades, the inquisition, the persecution of Galileo, witch hunts, and religious wars in Europe, and arguing that the great mass murders of the twentieth century can be laid at the feet not of religion, but atheist regimes bent on building heaven on Earth. All this is a pretty tall order, especially for a book of just 304 pages of main text, but the author does a remarkably effective job of it. While I doubt the arguments presented here will sway those who have made a belligerent atheism central to their self esteem, many readers may be surprised to discover that the arguments of the atheists are nowhere near as one sided as their propaganda would suggest.

Another main theme of the book is identifying how many of the central components of Western civilisation: limited government, religious toleration, individualism, separation of church and state, respect for individual human rights, and the scientific method, all have their roots in the Judeo-Christian tradition, and how atheism and materialism can corrode these pillars supporting the culture which (rightly) allows the atheists the freedom to attack it. The author is neither a fundamentalist nor one who believes the Bible is true in a literal sense: he argues that when the scriptures are read, as most Christian scholars have understood them over two millennia, as using a variety of literary techniques to convey their message, there is no conflict between biblical accounts and modern science and, in some cases, the Bible seems to have anticipated recent discoveries. D'Souza believes that Darwinian evolution is not in conflict with the Bible and, while respectful of supporters of intelligent design, sees no need to invoke it. He zeroes in precisely on the key issue: that evolution cannot explain the origin of life since evolution can only operate on already living organisms upon which variation and selection can occur.

A good deal of the book can be read as a defence of religion in general against the arguments of atheism. Only in the last two chapters does he specifically make the case for the exceptionalism of Christianity. While polemicists such as Dawkins and Hitchens come across as angry, this book is written in a calm, self-confident tone and with such a limpid clarity that it is a joy to read. As one who has spent a good deal of time pondering the possibility that we may be living in a simulation created by an intelligent designer (“it isn't a universe; it's a science fair project”), this book surprised me as being 100% compatible with that view and provided several additional insights to expand my work in progress on the topic.

Posted at 22:41 Permalink

Monday, March 17, 2008

Investing: The ultimate refuge

Take a look at this five day chart for Bear Stearns, which traded as high as 159 dollars a share within the last year, and was gobbled up by JP Morgan Chase for $2 per share yesterday, following the “rescue” announced earlier. That represents a drop in valuation by 96% compared to the price at the close of trading last Thursday.

bsc.png

This illustrates an unpleasant fact about investing, especially in a time of financial turmoil: with any paper asset you can lose everything—your stock can suddenly flatline like Bear Stearns when some surprise hits the market; your bond may become worthless when its issuer goes bankrupt, and even paper money may lose its value due to inflation or the imposition of exchange controls or suspension of convertibility by the issuing government.

Now, collapses of these kinds are rare and improbable circumstances, but it's the increasing likelihood of such calamities which defines eras of financial peril. The usual defence against such disasters is diversification: across issuers, industries, currencies, types of securities, and nations; part of your portfolio may get hit, but the rest will probably ride out the storm. As I mentioned in the last gnome-o-gram, in a full-fledged financial crisis, almost everybody loses, and he who loses the least ends up in the best comparative position at the end. While diversification can mitigate the impact of an isolated default, it may not help in the kind of chain-reaction collapse which occurred in the 1929–1932 period, where each successive default wiped out assets of other institutions, tipping more and more into insolvency. If it weren't for worries about such a scenario happening today, you wouldn't see the U.S. Federal Reserve rushing in to keep Bear Stearns from going bust (although if you're a shareholder, the distinction may not appear to be that great).

So, given a really dire worst-case scenario, is there any asset you can hold which won't go to zero if the whole financial fairy castle goes blooie. Yes, there is, and that's where the “barbaric relic”, gold, comes in. If you start looking up gold investment on the Internet, you will come across a multitude of “gold bug” sites which, in language as impassioned as it is ungrammatical, exhorts readers to load up on gold in order to reap profits beyond the dreams of avarice when the impending collapse of civilisation eventuates. This, to my mind, is precisely the wrong way to think about gold as an investment. Gold is an asset with intrinsic value: it is expensive to mine, and the quantity mined in any given year is minuscule compared to the quantity already above ground. Certainly gold fluctuates with supply and demand like any other commodity in a free market: in 1980 an ounce of gold peaked at in excess of $800 and by 1999 it had fallen to about $250 (long term chart), but at no time in human history has it ever gone to zero, and unless somebody invents a cheap way to transmute elements, it never will. In fact, if you average over a period long enough to smooth out the speculative booms and busts and exclude episodes of distortion of market forces by government intervention, the purchasing power of gold has remained about the same from the time of the Babylonian empire to the present day.

Consequently, gold is first and foremost a store of value; it's a foundational asset which may appreciate or decline, but can't go to zero, and in a widespread collapse which causes drastic depreciation of all kinds of paper instruments, it will, simply, by retaining its value, appreciate on a relative basis. Thus, one shouldn't think of buying gold in order to make money, but rather as a way to avoid losing money—it's the part of your portfolio you can always rely upon to be worth something, regardless of what happens to the rest. (This is not to say that one can't trade gold with the goal of speculative profits, just like any other commodity, but that's not what I'm discussing here.)

Aside from its function as an store of inherent value, gold is an otherwise crummy investment. Not only does it not pay interest, in most forms you have to pay storage and insurance charges just to hold it. If you keep it in physical form, you have to worry about it being stolen. In countries like the United States, which tax “capital gains” on sales of appreciated assets, gold is often exempted from tax preferences which apply to stocks, bonds, and other financial instruments. And finally, even though you may keep telling yourself that you own the gold for its intrinsic value, it may be difficult to ignore the day to day fluctuations in the price of gold.

Given these drawbacks, I believe the answer to the question “how much gold should I own” should be “as little as possible” (again, we're not talking about speculation here, just a foundation position you do not trade), balanced by the consideration that “it's enough that I'd be happy to be left with if everything else goes to zero”. Obviously, this is a judgement every investor must make based upon their own personal circumstances. But note that answering these questions does not involve any forecast of economic or market conditions whatsoever. The gold is there precisely because you don't know what tomorrow is going to bring, or what it may do to the rest of your portfolio; the gold is what you know you'll be left with regardless of whatever may happen.

In the next gnome-o-gram, I'll discuss various ways of including gold in a portfolio. Meanwhile, learn why it's yellow.

Other gnome-o-grams

Posted at 20:01 Permalink

Saturday, March 15, 2008

Investing: Euro-denominated sovereign debt

What with the U.S. Federal Reserve jumping in to keep investment bank Bear Stearns afloat, gold and oil hitting consecutive all time highs, and the U.S. dollar continuing to depreciate with banana republic speed, many investors are shifting their minds from greed to fear and contemplating the best strategy to ride out what may be a difficult and unpredictable era ahead. In a financial crisis, regardless of its nature (a big bear market, credit crunch, currency instability, inflation or deflation) the usual outcome is that everybody loses—the wealth-creating and -preserving mechanisms of the marketplace and economy are disrupted, and this causes assets of all kinds to depreciate.

In such an environment, the prudent investor shouldn't think about how to make the most of the calamity, but rather how to lose the least; when everybody loses, those who lose the least emerge in the best relative position, and those who preserve their assets when those of others evaporate are able to take advantage of the once in a generation bargains which emerge when Time magazine trumpets the end of civilisation and there are twenty sellers for every buyer in every market.

I am not predicting that the present situation will escalate into a full-fledged 1929–1932 deflationary credit collapse—while I think it is possible, at the present I'd put the probability of such a dire outcome at between 10 and 20 percent. But still, the possibility exists, and one should consider it among other scenarios when making investment plans.

In the days of the gold standard, gold itself was the ultimate store of value. Currencies may come and go, be revalued and devalued, but an ounce of gold could always be converted into whatever currency you needed to buy something, and the same ounce of gold which would have bought you a fine suit of clothes in imperial Rome will still do so today. In the age of paper money, unbacked by gold or any other physical store of value, there is no such universal refuge. Certainly gold remains an asset with inherent value which doesn't depend upon the integrity or solvency of any issuer, but its value in terms of currencies is a matter of supply and demand and the psychological dynamics of markets, and has historically exhibited a volatility with respect to purchasing power which makes it less of the sure thing it was in days of yore.

Consequently, in this age of floating, unbacked, paper currencies, the conventional refuge in times of financial turbulence has been short-term “sovereign debt”: interest-bearing obligations (bonds, notes, bills) issued by the central banks of sovereign nation states who issue the currency in which the instruments are denominated. The argument for the safety of such assets is as follows. First, since they're short-term (say 90 days to 2 years to maturity), your principal is not at risk due to a spike in interest rates—you can always simply wait until the bond matures and is repaid at full face value. Second, since they are obligations of the same government which issues the currency in which they are to be repaid, in extremis said government could simply print the money needed to repay its debtors. Now, to be sure, in a hyper-inflationary environment that currency may have depreciated compared to that with which you purchased the bond, but the short term means that except for the most dire circumstances (which are unlikely to ensue without ample prior warning to those who know how to read the signs) the depreciation will not result in a catastrophic loss of principal.

Not long ago, an investor could structure a defensive “hunker in the bunker” portfolio composed of short-term treasury obligations of the major industrial nations (Japan, Germany, Britain, France, the United States, Italy, Canada, the Netherlands, Australia, Sweden, Switzerland, etc.) each in their own currency, and balance currency and geographical risk around the globe. The advent of the Euro has complicated the situation. Euro-denominated debt is issued by governments in the Eurozone. While, say, the United States or the United Kingdom can always crank up the printing press to pay off their maturing sovereign debt, countries which have adopted the Euro are beholden to the European Central Bank and cannot create new Euros solely by a decision made at the national level. Now consider the case where, for example, a severe economic downturn has caused unemployment to rise in one of the weaker members of the Eurozone to double-digit figures, and social and political agitation threatens to destabilise the government. Mightn't those in power, like the British government which, when faced with the consequences of remaining within the constraints of the European Exchange Rate Mechanism (ERM), was forced to bail out in September 1992, be forced out of the Euro and, by exercise of their sovereign power, declare their Euro debts to be repaid at a discount (or with an extended maturity, which is equivalent) in their own new national currency?

To date, the Euro has never faced the kind of turbulence which brought down the ERM. History has not been kind to monetary unions unreinforced by a political union able to prescribe the fiscal policies of its members—it is an untested currency and store of value. One has to ask, therefore, whether Euro-denominated treasury obligations issued by member states should be deemed equivalent to those issued by governments with complete control over their own currencies, such as those of the United States, Japan, and the United Kingdom. I think the quick answer is no, but I wouldn't worry much about French and German government bonds: the Paris-Berlin axis cannot and will not tolerate instability or uncertainty regarding the Euro. It's the peripheral states you have to worry about. I wouldn't obsess about this, but I'd also pause before considering all sovereign debt issued by Eurozone governments as equal, or assuming that the monetary nationalism risk was totally priced into the interest rate.

Other gnome-o-grams

Posted at 21:09 Permalink

Wednesday, March 12, 2008

Generation Y in the Vapid of Space

It's been a while since I came across something this funny. Here is a presentation, published on the www.nasa.gov site, “Generation Y Perspectives” [PDF] prepared by four members of said generation (who, like their congeners, appear to have only first names, although one complete name can be deduced from the PDF file name, and the others are disclosed here), which, according to NASA Watch “made it all the way up to the Administrator's desk”—nice to know the administrator has plenty of time for such mission critical matters.

In the presentation, they indict NASA for “not engaging Generation Y” (slide 51, red type in the original) by failing to “connect” to their generation's defining characteristics born of their “life experiences” including having “a short-term career perspective” and being “easily bored” (slide 45). Just the kind of folks who solved problems like the combustion instability in the F-1 engine when NASA was young! This is perhaps the most vapid document I have seen posted on a U.S. government Web site, and that's saying something.

The creators of this presentation see their generation defined, and NASA's future lying, in a collection of logos representing ephemeral ventures created by their elders (slides 20 and 65), believe that watching TALK SHOWS and REALITY TV (slide 37, all caps in the original—I cannot bear to reproduce the red type again) means that, for them, “TV is not passive entertainment[;] it is an interactive experience!” which has shaped their “lives and outlooks” (slide 38), and that an “innovative, collaborative, participatory NASA” (slide 69) would generate such headlines as “NASA switches back to Macs” (slide 72)—yeah, that'll do it—taxpayers are going to write their congressbeings to urge picking their pockets for more space boondoggles because NASA uses cool computers.

As one who “engages” with this generation all the time via the feedback messages they send me and the comments they post on Web sites I read, I don't find this all that surprising, but you may. And keep in mind when reading it, as when reading comments on Slashdot, that these are the technological élite of the generation which will replace us as we scroll off the screen. Yikes. The editorial in the February 2nd, 1987 issue of Aviation Week & Space Technology urged that “NASA should not be allowed to operate in a vacuum.” If this is the kind of advice its administrator is seriously pondering, I couldn't agree more.

Posted at 21:12 Permalink

Tuesday, March 11, 2008

Reading List: Sins of the Assassin

Ferrigno, Robert. Sins of the Assassin. New York: Scribner, 2008. ISBN 978-1-4165-3765-6.
Here we have the eagerly awaited sequel to the author's compelling thriller Prayers for the Assassin (March 2006), now billed as the second volume in the eventual Assassin Trilogy. The book in the middle of a trilogy is often the most difficult to write. Readers are already acquainted with the setting, scenario, and many of the main characters, and aren't engaged by the novelty of discovering something entirely new. The plot usually involves ramifying the events of the first installment, while further developing characters and introducing new ones, but the reader knows at the outset that, while there may be subplots which are resolved, the book will end with the true climax of the story reserved for the final volume. These considerations tend to box in an author, and pulling off a volume two which is satisfying even when you know you're probably going to have to wait another two years to see how it all comes out is a demanding task, and one which Robert Ferrigno accomplishes magnificently in this novel.

Set three years after Prayers, the former United States remains divided into a coast-to-coast Islamic Republic, with the Christian fundamentalist Bible Belt in Texas and the old South, Mormon Territories and the Nevada Free State in the West, and the independent Nuevo Florida in the southeast, with low intensity warfare and intrigue at the borders. Both northern and southern frontiers are under pressure from green technology secular Canada and the expansionist Aztlán Empire, which is chipping away at the former U.S. southwest.

Something is up in the Bible Belt, and retired Fedayeen shadow warrior Rakkim Epps returns to his old haunts in the Belt to find out what's going on and prevent a potentially destabilising discovery from shifting the balance of power on the continent. He is accompanied by one of the most unlikely secret agents ever, whose story of self-discovery and growth is a delightful theme throughout. This may be a dystopian future, but it is populated by genuine heroes and villains, all of whom are believable human beings whose character and lives have made them who they are. There are foul and despicable characters to be sure, but also those you're inclined to initially dismiss as evil but discover through their honour and courage to be good people making the best of bad circumstances.

This novel is substantially more “science fiction-y” than Prayers—a number of technological prodigies figure in the tale, some of which strike this reader as implausible for a world less than forty years from the present, absent a technological singularity (which has not happened in this timeline), and especially with the former United States and Europe having turned into technological backwaters. I am not, however, going to engage in my usual quibbling: most of the items in question are central to the plot and mysteries the reader discovers as the story unfolds, and simply to cite them would be major spoilers. Even if I put them inside a spoiler warning, you'd be tempted to read them anyway, which would detract from your enjoyment of the book, which I don't want to do, given how much I enjoyed it. I will say that one particular character has what may be potentially the most itchy bioenhancement in all of modern fiction, and perhaps that contributes to his extravagantly foul disposition. In addition to the science fictional aspects, the supernatural appears to enter the story on several occasions—or maybe not—we'll have to wait until the next book to know for sure.

One thing you don't want to do is to read this book before first reading Prayers for the Assassin. There is sufficient background information mentioned in passing for the story to be comprehensible and enjoyable stand-alone, but if you don't understand the character and history of Redbeard, the dynamics of the various power centres in the Islamic Republic, or the fragile social equilibrium among the various communities within it, you'll miss a great deal of the richness of this future history. Fortunately, a mass market paperback edition of the first volume is now available.

You can read the first chapter of this book online at the author's Web site.

Posted at 22:19 Permalink

Wednesday, March 5, 2008

Reading List: The Adventures of Tom Sawyer

[Audiobook] Twain, Mark [Samuel Langhorne Clemens]. The Adventures of Tom Sawyer. (Audiobook, Unabridged). Auburn, CA: Audio Partners, [1876] 1995. ISBN 978-157270-307-0.
Having read this book as a kid, I never imagined how much more there was to it, both because of the depth of Mark Twain's prose as perceived by an adult, and due to reading his actual words, free of abridgement for a “juvenile edition”. (Note that the author, in the introduction, explicitly states that he is writing for young people and hence expects his words to reach them unexpurgated, and that they will understand them. I've no doubt that in the epoch in which he wrote them they would. Today, I have my doubts, but there's no question that the more people who are exposed to this self-reliant and enterprising view of childhood, the brighter the future will be for the children of the kids who experience the freedom of a childhood like Tom's, as opposed to those I frequently see wearing crash helmets when riding bicycles with training wheels.)

There is nothing I can possibly add to the existing corpus of commentary on one of the greatest of American novels. Well, maybe this: if you've read an abridged version (and if you read it in grade school, you probably did), then give the original a try. There's a lot of material here which can be easily cut by somebody seeking the “essence” with no sense of the art of story-telling. You may remember the proper way to get rid of warts given a dead cat and a graveyard at midnight, but do you remember all of the other ways of getting rid of warts, their respective incantations, and their merits and demerits? Savour the folklore.

This audiobook is produced and performed by voice actor Patrick Fraley, who adopts a different timbre and dialect for each of the characters in the novel. The audio programme is distributed as a single file, running 7 hours and 42 minutes, with original music between the chapters. Audio CD and numerous print editions are available, of which this one looks like a good choice.

Posted at 03:07 Permalink

Sunday, March 2, 2008

Reading List: Alien Powers

Minogue, Kenneth. Alien Powers. New Brunswick, NJ: Transaction Publishers, [1985] 2007. ISBN 978-0-7658-0365-8.
No, this isn't a book about Roswell. Subtitled “The Pure Theory of Ideology”, it is a challenging philosophical exploration of ideology, ideological politics, and ideological arguments and strategies in academia and the public arena. By “pure theory”, the author means to explore what is common to all ideologies, regardless of their specifics. (I should note here, as does the author, that in sloppy contemporary discourse “ideology” is often used simply to denote a political viewpoint. In this work, the author restricts it to closed intellectual systems which ascribe a structural cause to events in the world, posit a mystification which prevents people from understanding what is revealed to the ideologue, and predict an inevitable historical momentum [“progress”] toward liberation from the unperceived oppression of the present.)

Despite the goal of seeking a pure theory, independent of any specific ideology, a great deal of time is necessarily spent on Marxism, since although the roots of modern ideology can be traced (like so many other pernicious things) to Rousseau and the French Revolution, it was Marx and Engels who elaborated the first complete ideological system, providing the intellectual framework for those that followed. Marxism, Fascism, Nazism, racism, nationalism, feminism, environmentalism, and many other belief systems are seen as instantiations of a common structure of ideology. In essence, this book can be seen as a “Content Wizard” for cranking out ideological creeds: plug in the oppressor and oppressed, the supposed means of mystification and path to liberation, and out pops a complete ideological belief system ready for an enterprising demagogue to start peddling. The author shows how ideological arguments, while masquerading as science, are the cuckoo's egg in the nest of academia, as they subvert and shortcut the adversarial process of inquiry and criticism with a revelation not subject to scrutiny. The attractiveness of such bogus enlightenment to second-rate minds and indolent intellects goes a long way to explaining the contemporary prevalence in the academy of ideologies so absurd that only an intellectual could believe them.

The author writes clearly, and often with wit and irony so dry it may go right past unless you're paying attention. But this is nonetheless a difficult book: it is written at such a level of philosophical abstraction and with so many historical and literary references that many readers, including this one, find it heavy going indeed. I can't recall any book on a similar topic this formidable since chapters two through the end of Allan Bloom's The Closing of the American Mind. If you want to really understand the attractiveness of ideology to otherwise intelligent and rational people, and how ideology corrupts the academic and political spheres (with numerous examples of how slippery ideological arguments can be), this is an enlightening read, but you're going to have to work to make the most of it.

This book was originally published in 1985. This edition includes a new introduction by the author, and two critical essays reflecting upon the influence of the book and its message from a contemporary perspective where the collapse of the Soviet Union and the end of the Cold War have largely discredited Marxism in the political arena, yet left its grip and that of other ideologies upon humanities and the social sciences in Western universities, if anything, only stronger.

Posted at 21:05 Permalink