A lemon market for poachers

[My new post at the Recon Hub, which I'll repost in full here...]

Ashok Rao has a provocative suggestion for stopping the rampant poaching of elephant and rhino. Drawing on insights from George Akerlof’s famous paper, “A Market for Lemons“, he argues that all we need to do is create some uncertainty in the illegal ivory trade:

Policymakers and conservationists need to stop auctioning horns and burning stockpiles of ivory, they need to create this asymmetry [which causes markets to break down under Akerlof's model]. And it’s not hard. By virtue of being a black market, there isn’t a good organized body that can consistently verify the quality of ivory in general. Sure, it’s easy to access, but ultimately there’s a lot of supply chain uncertainty. 

There is a cheap way to exploit this. The government, or some general body that has access to tons of ivory, should douse (or credibly commit to dousing) the tusks with some sort of deadly poison, and sell the stuff across all markets. Granting some additional complexities, the black market could not differentiate between clean and lethal ivory, and buyers would refrain from buying all ivory in fear. The market would be paralyzed.

I really like Ashok's proposal… Not least of all, because it is virtually identical to an idea that Torben and I had whilst out for a few drinks one night! (This includes the invocation of Akerlof, by the way.) The big difference being that we didn't go so far as to suggest that the ivory should be poisoned: In our minds, flooding the market with “inferior”, but hard-to-detect fake product would do the trick.

To see why this might be the case, consider the economic choices of an individual poacher. Poaching is a risky activity and there is a decidedly non-negligible probability that you will be imprisoned, severely injured, or even killed as a result of your illegal actions. However, it still makes sense to take on these risks as long as the potential pay-off is high enough… And with rhino horn and ivory presently trading at record prices, that certainly happens to be the case. However, all that an intervention like the one proposed above needs to achieve, is to drive down the price of ivory to a level that would cause most rational agents to reconsider the risks of poaching. What level would this be exactly? That’s impossible for me to say, but I'm willing to bet that poachers are highly price sensitive.

A final comment before I close, inspired by another blog post that has also commented on Ashok's proposal. Jonathan Catalán correctly points out that one of the most valuable aspects of original “lemons” paper, is to force us to think carefully about why asymmetric markets don’t generally collapse into the degenerate equilibrium implied by Akerlof's theory. Perhaps the best answer to that is one hinted at by Akerlof himself: institutions like money-back guarantees, brand reputation, etc.. In light of this, Jonathan wonders whether the black-market wouldn't simply just adopt practices to weed out the counterfeit goods? My feeling, however, is that it is misleading to compare the ivory and rhino horn trade to other illegal markets in this respect. In the drug industry, for example, cartels are able to test the quality of a cocaine shipment simply by trying it themselves. Drugs have a very definite effect on us physiologically and so “quality control” (so to speak) is relatively easy to do. In comparison, we know that crushed rhino horn has no medical efficacy whatsoever… whether that is with respect to treating cancer or healing regular aches and pains. I therefore strongly suspect that it would be much harder for a buyer of powered rhino horn to verify whether their product is the real deal or not. The placebo effect will be as strong, or weak, regardless.

PS -- Legalisation of the ivory and horn trade is another economic approach to solving the poaching problem. Proponents of this view see it as creating opportunities for a sustainable market that both incentivises breeding and undercuts poachers. I am favourably predisposed towards this particular argument, at least in the case of rhino since they are easier to farm. However, I am not convinced that it will put an end to poaching, which will continue as long as the rents are there to be captured. There also remains the question of how demand will respond to a surge in supply, as well as issues related to a biological monoculture (i.e. rhinos will be bred solely on the basis of increasing their horn size). However, those remain issues another day.

Gold: Demand, supply and price

My old school friend and unashamed proponent of all things gold, Chris Becks, has left a few comments underneath this post in which I criticized misleading statements on the relationship between money supply and gold prices. After a bit of back and forth, I hope that we can at least all agree on the fact that it is simply wrong to claim "there is a 93 percent correlation between M2 and gold". However, Chris does raise a valid point about looking at both supply and demand factors. So I'm going to take the chance to do that and hopefully clarify my views on gold in the process.

First things first, here is a graph of the overall demand and production of gold from 2001 to 2011, which coincides with the gold bull run of the last decade. I've taken this data from the World Gold Council and have also included the gold price on the right-hand axis.

A few things immediately stand out. Demand and production are remarkably constant over the period despite the sustained price increase. Both  grow at an average rate of less than one percent per year over the full period. Demand exhibits a modest cyclical pattern, while production is almost flat. In fact, production even decreases slightly for a time -- even though, again, prices are rising![*] During these periods, additional demand must be met by recycled or "scrap" gold that is traded in second-hand markets. Of course, what we see here are simultaneous price-quantity combinations that clear the market, so we should avoid making direct comparisons with the classic demand and supply curves that one finds in text books. That said, it is undeniably striking that quantity is virtually unchanged over the same 10-year period where prices increase by over 450%. In technical jargon, this points to some extremely inelastic preferences.

Let's disaggregate things a bit to get see if we can get a better handle on what's really happening. The second graph that I'm going to show is gold demand broken up by major category: technology, investment and jewellery. I'll keep the gold price on the right-hand axis and will also include a line that captures the cost of mining gold.[**]

Things are starting to become much clearer. Looking at prices first, we can see that these have been undeniably impacted by the rising costs of producing an ounce of gold. This can be put down to a number of things, but chief on that list would be rising energy costs (since mines are incredibly energy consumptive) and the increased exploration and drilling costs that come with diminished supplies. Rising wage costs and depreciation costs are also factors.

We also see distinct trends emerging on the demand side. Gold use in the technological sector is extremely flat. The real change has occurred in the jewellery demand that has been displaced by investment demand. This is much more in line with what economic theory would predict; the demand for gold jewellery is (generally) decreasing in price. Economic theory would obviously also support the notion that demand for an investment good should increase as its value (i.e. price) increases. There is a complication, however, exactly because investment is fast becoming the primary force in maintaining overall demand for gold at record prices. Here are two ways of looking at it:

1. People are buying gold because other people are buying gold. This is classic bubble behaviour.
2. People are shifting towards gold because they believe that it has taken on a new level of intrinsic value. They regard it as providing a hedge against (tail) risk such as government insolvency or hyperinflation. They may even believe that it will gain increasing prominence in the international monetary system. 

Of course, the two cases above are not mutually exclusive. Different people have been purchasing gold for different reasons. However, it is important to understand what you are betting on when you buy gold. For example, do you really still believe that we are at risk of hyperinflation after our experiences of the last four years? (I say this even as there is growing consensus that we should encourage higher inflation to bolster the economy.) Alternatively, your position may simply be that central banks will accumulate more gold reserves and thus put upward pressure on the price. The latter notion strikes me as infinitely more reasonable than the idea that we are going to return to some kind of gold standard. (I don't just mean the likelihood that it will happen, but also the idea that it will somehow solve our problems and not create a host of new ones.)

In sum, I don't deride gold, but neither do I think it has any mythical qualities. This includes the ability to properly regulate the present-day international monetary system. I advised those close to me to invest in the stuff immediately after the crisis and this has obviously turned out to be a profitable decision. I also believe that current economic conditions will support a relatively buoyant gold price for some time to come. However, I recognise that gold is subject to market vagaries and uncertainties that no-one can properly claim knowledge of. That is why I regard gold as an important component of any investor's current portfolio, but would never recommend increasing your overall exposure above, say, five percent (and perhaps even half that). Moreover, what worries me is that the people who are really bullish on gold are staking their claims on events that my economic logic can only regard as pretty remote probabilities. I may be wrong, but I'm very nervous to load up on any asset whose value appears to be increasingly driven by long-shot bets.

NOTE: Comments disabled because of the inordinate amount of spam getting through. Spambots appear to love gold even more than libertarians.
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[*] I have discussed the negative short-run supply elasticity for gold in more depth previously. Scroll down to the bottom of this post if you are interested in that phenomenon.
[**] This is based on the authoritative "all-in" cost metric produced by precious metals advisory GMFS, which incorporates things like deprecation in addition to normal cash costs (per ounce). Unfortunately, I don't have information over the full period and had to piece together the figures from different sources. Still, I hope the general message is unaffected.

Is gold highly correlated with money supply?

Amidst all this talk about US Republicans eyeing a return to the gold standard, something on my twitter feed earlier this week caught the eye: A link to an old Zero Hedge post together with a claim that "there is a 93% correlation between M2 [money supply] and gold". A similar post here is more specific in saying "[t]he correlation between the total U.S. M2 and gold has exceeded 0.90 since November 2004".

Now presumably, this tweet was aimed at countering the inconvenient fact that the correlation between price inflation (i.e. CPI) and gold is virtually zero. And, if predictions of imminent hyperinflation have yet to materialise, well then at least "hard money" types can point to way in which monetary inflation has manifesting itself in the surging gold price of the last decade. (There's a lesson to be learned here about the velocity of money, kids, but that will have to wait until another time...)

Anyway here's a graph of the gold price and U.S. M2 since 2004, taken from the FRED website. Both are shown in terms of moving monthly averages and, sure enough, the correlation looks very high indeed.



Unfortunately, there are two things wrong with this picture. The first is that the time-frame really does matter. The second has to do with the statistical properties of these series. Let's take these two issues in turn.

Consider what happens when we look at the period from 1981 (which is first date for which FRED has data on both series) until 2004.



Woah! That positive relationship isn't looking too good all of a sudden. Now, of course, I can already hear angry golden-tinged voices accusing me of dueling a strawman. The correlation coefficient was specifically cited for the 2004-post period, so who really cares about what happened 20 or 30 years ago? Okay, perhaps something special happened around the mid-2000s that explains why the two variables have since become so intertwined. Fine, but then don't try to tell me that it's anything specifically to do with money supply. The noticeable kink in the M2 series leading up to that moment occurs around 1995 (after a period of mild tapering), which is close on a decade before the supposed special relationship with gold prices begins.

The broader point here is that if you are going posit a structural theory for why two variables are related, then that relationship needs to have enduring qualities. If not, how can you be sure that gold and M2, rather than one causing the other, aren't both being driven by some other factor? (For one thing, the money supply is supposed to be endogenous to what is happening in the broader economy...) I'm inclined to argue that focusing on the period since 2004 is just a form of data-mining and, as we'll see next, not a particularly good example of that anyway.

Okay. So, ignore the fact that the (weak) longer-term correlation between M2 and gold prices matters. Surely, eight years of data showing a 90%+ correlation can't be denied? Surely, we can say with extreme confidence that recent gold prices have been greatly influenced by money supply? Right?

RIGHT??

Sadly, no. Whenever someone points excitedly to very high correlations between trending time-series, your spidey-sense should be going off like Peter Parker on methylamphetamine. The reason lies with one of the fundamental concepts in time-series econometrics: Nonstationarity.

Wait a minute. Are those series... nonstationary?

Without getting too bogged down by statistical concepts, nonstationary series are characterized by a mean and variance that are changing over time. It's not that they can't be growing or declining over time, but rather that they should consistently return to some kind of mean trend. The most important thing from our perspective is failing to account for this issue will generally lead to spurious (i.e. "nonsense") regression results; an idea that goes all the way back to a classic paper by Yule  in 1926.

Aaaaaaaand.... as you might have guessed by now, the above series are nonstationary. In technical parlance, they are referred to as random walks with drift. Now, there is a famous exception to this rule that occurs when two series are said to be "cointegrated". Again, I'd rather avoid delving too deeply into the murky waters of statistics in a blog post, but suffice to say that that cointegration does not hold here.

To avoid the problems of bullshit spurious regressions, we must therefore adopt a tried and tested approach: Take the first differences of the series and only then test for correlation. Doing so produces a correlation coefficient of exactly <drum roll>... 0.32. Moreover, if we actually regress gold on M2 we get a pretty unimpressive R-squared statistic of 0.1. In other words, only ten percent of the gold's movements are explained by what is happening to money supply.  [UPDATE: Based on the comments, let me again emphasise that these numbers are specifically for the "highly" correlated post-2004 period.]

THOUGHT FOR THE DAY: Simply regressing gold prices on any nonstationary series -- whether that be iPhone sales or the number of Crocs™ wearers in Bangladesh -- would likely produce equally impressive, but obviously bogus, results. Now gold fans might be inclined to protest loudly at this point: "Duh", but there's no theoretical basis for linking those goods to gold. We have a theory that predicts the price of gold will rise with (monetary) inflation!" Except that we've just tested that theory and found it, if not entirely wanting, then at least highly oversold. Perhaps a bit like gold then... [See comments.]

PS - For anyone interested in checking all of this for themselves, here is some Stata code that I used to test the series. The code will always call the most recently available FRED data, so the exact figures you get may differ from those presented here depending on when you run it.

NOTE: In writing this post, I see that others have effectively made the same point before.

If it worked for Casanova...

This might not hold much interest beyond some old school friends reading this blog, but flicking through channels this morning I stumbled on a CNN documentary about oyster-harvesting off the coast of Namibia... Featuring my old boarding house master (and quasi John Travolta lookalike), Jason Burgess.

Apart from a bit of nostalgia for me (Great House, Mason House!), this is a nice summary of the challenges and opportunities provided by mariculture and aquaculture. At a broader level, if offers some real-life insight into establishing a sustainable business venture in the more remote parts of the world.

The programme continues below the fold (although I must express my displeasure surprise that the oysters were consumed sans Tabasco):

Facts vs Beliefs (George Monbiot edition)

When the facts, I change my mind. What do you do, sir? 

- Apocryphally attributed to John Maynard Keynes

A criticism often leveled at environmentalists is that they are far too wedded to their own ideological agendas to ever partake in rational debate.

Ignore, for the moment, that such criticisms are usually dripping in hypocrisy. (My experience is that extremists on both side of the aisle not only deserve each other, but have a remarkable gift for pointing out their own flaws in their opponents.) The unfortunate truth is that such characterisations of blinkered "green" thinking does hit the mark in many cases. While it's hard to fault someone's sincerity in arguing passionately for the environment, too often reason is thrust aside at the alter of Gaia.

All this points towards why I enjoy reading George Monbiot. His essays often provoke, but they always make you think. Alongside his ability to construct compelling arguments using detailed lines of evidence, his honesty makes him a rare commodity in the world of "opinion" columnists. He is not scared to challenge power or orthodoxy, but is also prepared to admit when gets something wrong.

Now, I've praised Monbiot along these lines before (e.g. here). However, he provides some deeper insight into this admirable trait in today's column. [Background: New data made available by a UK researchers show that resource use (at least in the UK) is diminishing with, and may even be caused by, GDP growth.]

Is the 'peak consumption' hypothesis correct?

I won't deny it: my first reaction on seeing the results of Chris Goodall's research into our use of resources was: "I don't want this to be true." Obviously, I'd like to see our environmental impacts reduced, as swiftly and painlessly as possible. But if his hypothesis is right – that economic growth has been accompanied by a reduction in our consumption of stuff and might even have driven it – this would put me in the wrong. I'm among those who have argued that a decline in our use of resources requires less economic activity, or at least a transition to a steady-state economy. 

[snip]

That was what the available research suggested at the time. But if Goodall's findings are correct, they put a coach and horses through something I strongly believed to be true. 

So, for a few minutes, I engaged in what psychologists call protective cognition. I started scouring his findings for reasons to reject them. It took an effort of will to shake myself out of it and remember that the intellectually honest response to new information is to adjust our beliefs to the evidence, rather than adjust the evidence to our beliefs. We must question and test new findings of course, but we must do so as dispassionately as possible. Otherwise we are in danger of doing more harm than good, and of wasting our lives promoting the wrong causes. Anti-vaccine campaigners please take note. 

Starting again, this time reading it as objectively as I could, I saw that Goodall's report appears to be rigorous and unbiased. It answered many of the questions and objections I raised as I read it. People like me have to step back and consider the possibility that Chris Goodall could be right when he states:

"Absolute decoupling of resource use from economic growth may possibly have occurred … GDP growth, because it brings technological progress which is correlated with more efficient use of resources, may help reduce environmental damage."

[...] 

Monbiot does go on to ask some legitimate questions that might challenge the extent to which we can generalise Goodhall's findings. (For instance, by pointing out that declining resource use in the UK is a relatively new phenomenon with much uncertainty over the longer term.) However, the principle is worth repeating: "The intellectually honest response to new information is to adjust our beliefs to the evidence, rather than adjust the evidence to our beliefs."

Krugman, Hotelling and gold

... and negative (short-run) supply curves.

Paul Krugman's recent column, which links the high price of gold to a disinflationary environment, has generated a lot of discussion in the blogosphere. In essence, he references the Hotelling Rule to show that a high gold price is perfectly consistent with the rock-bottom treasury yields... despite the fact that these two extremes seem to simultaneously imply contradictory expectations of 1) hyperinflation and 2) deflation/very low inflation.

What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold. But if the price path is going to be flatter while still leading to consumption of the existing stock — and no more — by the time it hits the choke price, it’s going to have to start from a higher initial level. So the change in the path should look like this: 

 

And this says that the price of gold should jump in the short run. 

The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future. 

[...]For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. [...]So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

Krugman's invocation of the Hotelling Rule here is pretty neat. I certainly count myself as someone in the non-inflationista camp and have been using the "right for the wrong reasons" line on gold bugs for a while. At least those claiming the high gold prices reflects an impending surge in (hyper)inflation, while the actual numbers themselves -- CPIX, BPP and bond rates -- show anything but. It's like an overweight person looking into a fairground mirror and congratulating themselves on their successful diet... all the while losing weight for unrelated reasons. Perhaps they've become enamoured with their reflection and forgotten to eat?

Tortured metaphors aside, I do, however, have two problems with Krugman's analysis:

1. Bond rates certainly aren't low everywhere (Greece, Portugal, etc), and US consumers certainly aren't the only ones buying gold.
2. The Hotelling Rule has, historically, been a poor guide to the price path of gold (and, indeed, other metals). There's nothing wrong with the reasoning behind the H-R in of itself; indeed, it conveys an elegant truth that is almost impossible to refute, ceteris paribus. However, abstracting to a pure interest rate effect hasn't proven empirically successful. In short, it has been overwhelmed by technological shocks on the supply side, as well as other demand-related factors.

That's not to say that there isn't merit in Krugman's argument, because it certainly serves a purpose in trying to reconcile high gold prices and low interest rates. At least, in the US. My own opinion differs, to be sure, but is not entirely incompatible. I see the high gold price is primarily a function of fears of insolvent governments being unable to repay their debts, and the simple dearth of alternative investment opportunities out there. As long as equities are yielding negative returns and bonds yields are low and/or risky, even modest rises in gold prices suddenly become very attractive. <Insert jokes about beauty contests here.>

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There is a quasi-related factor to all this is that I want to finish today's post with:

The supply elasticity of gold production in certain countries -- most notably South Africa -- is negative. That is, gold miners actually cut back on production following an appreciation in the price of gold rise. Just as high gold prices and low interest rates seem incompatible (at least at first blush), the idea that producers should reduce production in the face of rising prices appears to contradict common sense. Until you understand a bit more about the circumstances under which gold miners operate.

Gold mines in South Africa are incredibly deep, making them complex and expensive operations to run. When the price of gold suddenly rises, producers are afforded the opportunity to prolong the life expectancy of a mine. They do this by mining the poorer quality veins of gold first, since it is now profitable to do so. When the price falls again, whether that be in absolute terms or relative to costs, they switch back to mining the richer deposits and thereby maintain projected cash flows. Gold producers are thus trading off short-term profitability against the expected lifetime value of their mines.

Rather presciently, John Maynard Keynes hypothesised the backward-bending supply curve for South African gold production for these reasons back in 1936.

THOUGHT FOR THE DAY: There are many factors pushing up the price of gold to extreme highs. Personally, I don't think that inflationary fears can justifiably be cited as the key driver. At the same time, there are reasons to be sceptical that high gold prices necessarily follow low interest rates (as per the Hotelling Rule). Nevertheless, there are certainly strange forces at play in determining the gold price right now. Some of the most important ones would, at first glance, even appear to contradict common sense. It may be convenient to be right for the wrong reasons for a while, but you wouldn't want to stake your career (or your house) on it any longer than is necessary.

Quote of the day - Fish

Speaking of life in the oceans...

"Sharks are just evil bastards. I'm quite happy if all the sharks just went because they eat fish and us. And we need the fish."

- Eddie Izzard

Izzard is a genius... quite possibly my favourite comedian. The above line is taken from his performance at the 2006 Secret Policeman's Ball (the fundraising event for Amnesty International)... I'd highly recommend his 2008 appearance as well if you haven't seen it. (Some NSFW language.)

Paul Collier talk on "The Plundered Planet"

I went to a talk last night by Paul Collier. For those of you who don't know, Collier is a big cheese in the development studies world, probably best known for his acclaimed 2007 book, "The Bottom Billion". (I'm fairly embarrassed to say that I actually haven't read it yet. It's been on my bookshelf for a while, but the GF has beaten me to it and is currently finishing it up before I get my chance.) 

Anyway, Collier was in town promoting his new book, "The Plundered Planet", of which I have just bought a copy. To quote the book jacket: he ambitiously aims to "reconcile the immediate needs of the world's burgeoning population with a sustainable environmental future".

Collier is a very good speaker and much of what he said last night made eminent sense. For example, he talked about the pitfalls of poor -- but resource rich -- countries trying to strictly emulate the Norwegian model for managing a sovereign wealth fund. In particular, these nations should almost certainly focus on significant capital development in their own countries rather than investing in equities around the world as Norway has done. (The latter makes sense for Norway since it already has an incredibly high level of in-country per capita investment.) 

He also dismissed the curious notion that developing nations should preserve their natural environment based on the (ethical?) preferences of people in rich countries. [Tip: If you really don't want someone in a poor country to develop a wetland, rainforest, etc... Pay them not to.] Along these lines, Collier made the interesting observation that China's strategy in Africa -- resource extraction in return for infrastructure -- is effectively a monopoly. In other words, if you're an African country in the business to sell your resources in exchange for infrastructure development (without too many strings attached), then China is pretty much the only option available to you.

Now, international agencies such the IMF and World Bank have typically shunned Chinese-style, "resources-for-infrastructure" deals as opaque. Instead, they prefer a more conventional "resources-for-cash" exchange, whereby local governments would build their own infrastructure using money/FDI paid into their treasuries. However, there are many reasons to believe that the Chinese model may be far more attractive to a prudent finance minister of a developing nation. Certainly, he or she might fret over how large a share of the money pie the presidency will ultimately allocate to infrastructure at the end of the day (versus other areas such as military or governmental salaries). By doing business the Chinese way, the finance minister can at least rest assured knowing that badly-needed roads, bridges, etc are going to be built. Thus, if more OECD governments had been prepared to imitate some elements of the Chinese model instead of just criticising it, competition would likely have yielded better environmental and infrastructure outcomes for developing countries than the current situation where China operates alone.

Having said the above, some of Collier's arguments not make sense to me. After providing a nice description of the concept of resource rent, he went on to apply a few insights to the case of transnational resources - in this case, fish. He argued that overfishing is in large part down to the fact that economic rents are not being captured/taxed by any regulatory bodies; that abnormal profits are accruing straight to fisherman which encourages them to overfish. Now, I'm not particularly sure about the direct causation he offers... I think it's just that there are too many people fishing (because of a lack of property rights in the world's oceans), rather than it being a matter of easy profitability. I also wasn't convinced by his proposed solution as he seemed to be arguing for a regulatory system on international fisheries, whereby taxes would be paid to the UN in order to fund the World Food Programme. While admirable its idealism, this scenario strikes me as highly unlikely.

Still, I guess I better read the book before commentating further. It's a few back in the queue right now, but I've certainly heard enough to pique my interest...

Passage of the day - Of Columbus, Conquistadors and Cruelty

So I'm a few days late, but Monday was Columbus Day for our friends over States' side. I know this because Aguanomics mentioned it at the time, offering the following aphorism:

The Europeans brought technology and used resources for population growth. The locals would have preferred to use the technology for themselves, but they didn't have the guns.

Anyway, the above reminded me of a great passage I read a while ago in David Landes' The Wealth and Poverty of Nations:

The scarcity of gold was a disappointment, but [Columbus] made the best of things and assured that these islands could be an abundant source of slaves[...] Caribbean history after the coming of the white man was in large part the replacement of people by cattle, followed by a repeopling with black slaves to work the sugar plantations. 

The process of depopulation was hastened by massacre, barbarous cruelty, deep despair. The natives committed suicide , abstained from sex, aborted their fetuses, killed their babies. They also fell by the tens and hundreds and thousands to Old World pathogens (smallpox, influenza). The Spanish debated whether the savages they encountered had a soul and were human; but the record makes clear where the savagery lay. When Columbus met his first Indians, he could not get over their friendliness; to this the Spaniards, frustrated for gold, returned bestialities unworthy of beasts. (p. 71)

You can read the whole chapter here. (The most graphic bit actually follows directly from the quoted section. Among other acts of savagery, there is a particularly gruesome sentence involving the treatment of pregnant women...)

On the subject of brutal Spanish incursions into the Americas, it would be rude not to include the following Neil Young classic:

Young does, of course, rather play down the violence that was endemic in some parts of South America prior to the Europeans arriving. Landes actually has a very good line on this issue in a later chapter when discussing a question posed by another eminent scholar, Jared Diamond: Why did the Incas behave so naively (stupidly?) in their dealings with the Spanish, when the latter were so consistently treacherous? Diamond suggested that it was a matter of innocence: The Spanish were well versed in the devious history of man and empires, while the Incas had "no personal experience of any other invaders from overseas... had not even heard (or read) of similar threats to anyone else, anywhere else, anytime previously in history". However, having listed some of the stark cruelties which had characterised the pre-European Inca Empire, Landes reasonably counters: "But the Incas should have known themselves." (p. 108)

PS - If you're into covers... well, I am. The Dave Matthews Band and Warren Hayes do a very respectable version of "Cortez the Killer" live in Central Park here.