Crashing the credit network

It appears that those coping with the credit crisis aren't sufficiently ramped up on network theory. This paper by Zhao et al, titled "Tolerance of scale-free networks against attack-induced cascades", has a paragraph which captures the current situation.

... the presence of such a small set of important nodes means that the network can be fragile because attack on one or a few nodes in this group can have a devastating effect. In particular, considering that those nodes typically handle a substantial fraction of loads necessary for the normal operation of the network, an attack to disable one or few of these nodes means that their loads will be redistributed to other nodes. Because the amount of the redistributed loads can typically be large, this can cause other nodes in the network to fail, if their loads exceed their capacities, which in turn causes more loads to be redistributed, and so on. This cascading process can continue until the network becomes disintegrated. Indeed, simulations show, for instance, that for a realistic power-grid network, attack on a single node can disable more than half of the nodes, essentially shutting down the network...

Lehman Brothers was a well-connected, load-bearing node in a complex network of credit. Its sudden disappearance crashed the credit network. In a disintegrated credit network, no one will lend out money; that condition describes the credit crunch we're experiencing now, where governments and central banks are having to step in as lenders of last resort. Under normal functioning conditions, the loss of a random node won't crash the network. We're not in normal conditions. Calls to "amputate" or otherwise permit major credit nodes to fail apparently reflect a failure to recognize the failure modes that networks can exhibit.

Cascading failure is evident in the commentary on the collapse on a Krugman's blog entry.

What the article really adds, though, is the details of the chain reaction that did the damage... Lehman’s fall led to (1) a run on money market funds, causing commercial paper rates to soar (2) soaring rates on credit default swaps, driving AIG over the edge and sending LIBOR sky-high.

Game theory and the food supply chain

Has Wal-Mart been studying game theory lately?

"I firmly believe that a company that cheats on overtime and on the age of its labour, that dumps its scraps and chemicals in our rivers, that does not pay its taxes or honour its contracts, will ultimately cheat on the quality of its products," said Lee Scott, the company's chief executive, speaking in Beijing at a specially convened conference for suppliers...
"When we have bought overseas, we have purchased historically in a very transactional manner. We need deeper, longer-term relationships with suppliers so they are not based upon the last penny but provide a quality product at a very good price.

This sounds analogous to a tit-for-tat solution to the Iterated Prisoner's Dilemma. In tit-for-tat strategy, cooperators (safe food suppliers) will be rewarded. Defectors (cheaters who water down food products unsafely) will be punished (left to go bankrupt). Therefore reputation counts.

Aftershocks

Richard Herring pointed to 1998 as the start of the real-estate bubble in the United States.

Until about 1998, you were making about as much on your house as on your treasury bill, as if you have invested in treasury bills. The appreciation started just about as interest rates went down... But it led to a circumstance where most of the people doing the business had not in their lifetime experienced a downturn in house prices.

And that in turn led to one of the unreasonable assumptions which underpinned the subprime crisis. It's also worth recalling the origins of the recession that began in 1998. Nouriel Roubini states it succinctly:

During the Asian crisis the yen weakened all the way to 147 to the US dollar by late August 1998; and the BoJ reduced its policy rate to 0.25% ... Then in August 1998 Russia defaulted ... and this default triggered a seizure of global financial markets as major players with levered position started to get margin calls, had to dump their assets to cover their margin calls and started to cover their yen carry trade shorts. LTCM then was hit by this liquidity seizure and avoided a near default in late September 1998 via a private sector bailout coordinated by the NY Fed.

The current liquidity crisis is to some degree an aftershock, an unintended consequence of the response to the 1997 Asian Financial Crisis and 1998 Russian financial crisis.

Make money, not war

Back in February, it was reported that Chinese aimed to send tens of millions of workers to Africa.

An estimated 750,000 mainly rural poor have moved there ... working on projects to build railways, construct electricity grids and even farm the land.
... officials want more of China's surplus rural population of tens of millions of people to follow them, saying they will earn money and help the continent to develop.

Obviously, this measure is aimed at tackling rural unemployment. However, this policy is more intriguing once one considers that these workers being sent abroad are more likely to be male than not. This may be another strategy for tackling the gender imbalance: exporting young males abroad so they won't make trouble on the home front, thus defusing the threat posed to political stability by the youth bulge. According to a report last year:

China will have 30 million more men of marriageable age than women in less than 15 years as a gender imbalance resulting in part from the country's tough one-child policy becomes more pronounced, state media reported Friday.

The numbers line up pretty well for order of magnitude.

The Pentagon and the Poisson distribution

In "Statistics of Deadly Quarrels", Richardson plotted the magnitude of conflicts (by death toll) and ended up with a statistical curve that was near a Poisson distribution. Assuming this trend continues, what should this mean for Pentagon planning? From a review of Richardson's book:

It's no surprise that the two World Wars of the 20th century are at the top of this list; they are the only magnitude-7 conflicts in human history. ... the remainder of the 315 recorded wars, along with all the thousands of quarrels of intermediate size, produced less than a fourth of all the deaths.
The list of magnitude-6 wars also yields surprises, although of a different kind. Richardson identified seven of these conflicts, the smallest causing half a million deaths and the largest about 2 million...

While planning for the Big One is traditional, the statistics imply that we should also expect a larger number of Smaller Ones that may require US-led intervention, and an even greater number of lower-intensity conflicts which may tie up significant resources due to sheer quantity. Iraq is likely not an exceptional case, but merely a conflict further down the curve.

Globalization and gold flows

In May I ran across some statistics regarding the global gold trade in 2006. Dubai is apparently rising as the new center of the gold trade, taking over from Amsterdam.

According to GFMS Gold Survey (2006) the world's production of gold (2,919 tonnes) is distributed geographically in the following proportions; to China (800); India (700); the Middle East (535); Europe (444); North America (235); Russia (87); South America (75); and Australia (10).

Lightly crunching the numbers, that means that China and India combined consumed over half the annual production for 2006. Add in the contribution from the Middle East and recycled petrodollars, and the proportion rises to over two-thirds. It's reasonable to infer that the price of gold to a large degree represents the fortunes of the emerging economies of China and India, along with a lesser contribution from the price of oil.

How Iran may strike back

Some days ago, it was reported that Hezbollah sleeper cells were being activated in Canada. There's no particular reason for Hezbollah to limit target recon operations to Canada. The purported reason is revenge for the February assassination of a Hezbollah leader, for which Hezbollah blames Israel. However, there may be deeper motivating reasons, given that one expert claimed that such attacks would alienate supporters.

Today, in response to alleged Israeli military exercises, Iran warned that it would deliver a devastating response to any attack. Iran's Revolutionary Guard provides assistance to Hezbollah. Given the timing, it's conceivable that Iran may employ Hezbollah as a proxy to retaliate against Israeli interests on a global scale should Israel launch an air strike. Similarly, it's conceivable that Iran may consider extending such operations to retaliating against American interests globally should the USA launch air strikes.

How to get the world to fund a bailout

It appears that pension fund investments are fueling a bubble in commodity prices. According to the article, the top five companies doing these swap agreements are: Bank of America, Citigroup, JPMorgan Chase, HSBC North America Holdings, and Wachovia. All of the firms have taken billions of dollars in writedowns in the asset-backed security bust. By not plugging the swaps loophole, US regulators are effectively bailing out these companies without resorting to directly raiding domestic tax coffers. Unfortunately, contributing to the speculative rise in commodity prices is effectively an indirect tax upon the entire world.

It is ironic when the very act of hedging against inflation directly results in inflation, by driving up the price of economic inputs. Inflation becomes a self-fulfilling prophecy.

Domestic information operations

Today the New York Times reported on an effort by the US administration and Pentagon to shape domestic media coverage of the Iraq war. An informal network of military analysts was tapped and urged to send out the desired message.

Records and interviews show how the Bush administration has used its control over access and information in an effort to ... shape terrorism coverage from inside the major TV and radio networks.

This prompted me to recall and earlier effort from 2002 that later got officially canned, the Office of Strategic Influence.

The Pentagon has established a new Office of Strategic Influence to market America's war on terrorism outside the United States...
Under law, the Pentagon operation can only work outside the United States.

The current administration practices tight access control to information, according to this report from 2005.

As part of a tight message control, the Bush White House does have a few "designated hitters" who speak on the record with reporters. It confines that kind of access to presidential counselor Dan Bartlett and a few others. The policy is a big shift from past administrations that offered frequent background briefings with top officials who helped reporters and their readers and audiences understand the rationale for decisions and strategies.

Though the administration seems to be applying scientific management principles with regard to controlling information flow, there appears to be a glaring blind spot with regard to managing their reputation. Credibility counts, particularly when attempting to persuade a global audience that may be highly skeptical.

Another reason why Nepal is in China's pocket

We've all seen reports of Nepalese police beating and detaining Tibetan protesters. So why the support? The Reuters piece blithely states:

Nepal, which gets development grants from the Chinese government, accepts Tibet as part of China.

Let's not forget another form of "aid": arms sales. According to a Nepalese source:

Two huge jumbo size aircrafts landed at the TIA Kathmandu delivering huge cache of arms and ammunitions from China and US some ten day ago...
A consignment of 120 tons of modern weapons from China arrived first at the TIA, tentatively on January 25-26.

China is arming Nepalese government forces, enabling them to face off against a Maoist insurgency. Keeping Tibetan territory under Chinese control is clearly worth more than backing a Maoist insurgency no longer in ideological lockstep.

Despite its Maoist identification, the CPN(M) has not won Beijing's blessing. By the time the CPN(M) was formed, Beijing had led China some way into a pro-capitalist transformation in which revolutionary solidarity has little relevance.

This is a somewhat awkward situation tactically for the West, since the USA and the UK have been providing arms to the Nepalese government in order to keep the Maoist insurgency from gaining ground or linking up with other regional insurgencies. India has its own regional and internal reasons for courting Nepal with arms sales, such as allied insurgent groups operating within the state of Assam. All in all, the Nepalese government appears to be playing these disparate interests against each other in order to ensure a supply of arms, with moderate success.

Interestingly, the Nepalese Maoist insurgents apparently released a statement backing China earlier in March.

The CPN-Maoist Wednesday said that Tibet is an integral part of China.Issuing a press statement here on the ongoing unrest in the Tibet Autonomous Region, the Maoists expressed sadness over the continuing violence in Lhasa.
"We strongly condemn the incident that put at risk the freedom and sovereignty of the Chinese people. We want to draw the attention of the concerned authority to the activities against China at the Nepal-China border," Kantipur quoted the Maoist statement, as saying.

I wouldn't put it past China to be playing both sides of a conflict in Nepal, but it's also possible that the Nepalese Maoists are placating China with the aim of limiting the amount of arms China provides to the Nepalese government.

Chinese 4GW and cyber informants

It appears that Chinese government hackers are attacking Tibetan protest networks. The goal is clearly to infiltrate their computer systems and likely to gain access to all protest contacts, mapping the social networks of connections between them.

Groups sympathetic to anti-Chinese protesters in Tibet are under assault by cyber attackers who are embedding malware in email that appears to come from trusted colleagues.
The email is being sent to members of human-rights groups. The messages include attachments in PDF, Microsoft Word and Excel formats, that install keyloggers and other types of malware once they're opened. The malicious payloads have been disguised to evade detection by anti-virus scanners.

In effect, compromised computers become cyber informants.

Dirty bombs and cocaine

The recent news out of Reuters is potentially alarming:

Colombia's FARC guerrilla movement was trying to get hold of radioactive material to make a "dirty bomb", Colombian Vice-President Francisco Santos said on Tuesday.

That itself is a vague claim. If we go back to October, we find a likely connection between cocaine and plutonium by following the money. FARC is big in the cocaine trade, so this is one possible route by which FARC could have sought a dirty bomb.

Authorities in Italy are investigating a mafia clan accused of trafficking nuclear waste and trying to make plutonium.
The 'Ndrangheta mafia [...] has been accused by investigators of building on its origins as a kidnapping gang to become Europe's top cocaine importer, thanks to ties to Colombian cartels. But the nuclear accusation, if true, would take it into another league.

It's not clear to me why FARC would want a dirty bomb in the first place. Their apparent ally in Venezuela, Chavez, could want one in order to deter potential US invasion.

Al Qaida in Iraq having recruitment problems?

I'm sure everyone's heard by now that two allegedly mentally disabled women were strapped with explosives and used as bombs, purportedly by remote control. Assuming evidence will back up those claims, a possible inference is that foreign militants are now harder to come by. From the Washington Post:

Based on the Sinjar records, U.S. military officials in Iraq said they now think that nine out of 10 suicide bombers have been foreigners, compared with earlier estimates of 75 percent. Similarly, they assess that 90 percent of foreign fighters entering Iraq during the one-year period ending in August came via Syria, a greater proportion than previously believed.

Given those figures, it seems reasonable to conclude that the domestic pool of potential suicide bombers may be tapped out. If the quantity of suicide bombers can't be sustained, there will definitely be incentive to maximize the psychological impact of each suicide bomber. Another alternative would be to coerce victims into suicide bombing.

Why racial profiling won't work

Al Qaida will recruit white Britons.

As many as 1,500 white Britons are believed to have converted to Islam for the purpose of funding, planning and carrying out surprise terror attacks inside the UK, according to one MI5 source.

Not all of them will radicalize, but it's a potential talent pool. Though not explicitly stressed by the source, it's also clear that prisons are a recruiting ground. Perhaps reason enough to reexamine the prison system.