Finally, a Quantity Estimate for Sanctions (and other Monday Morning News)

This is the first number I've seen: Liam Peach from Capital Economics estimates that about 40% of Russia's foreign exchange reserves are now out of reach for use by Russia. Believe that 40% is of the roughly $650B they have. On the other hand, roughly 15% of that is held in China, where they're probably loving this, and China has been developing an alternative to SWIFT (CIPS) that clears transactions in yuan through Chinese entities rather than through dollars at western banks.

FWIW: Iran and North Korea were already been banned from SWIFT. They haven't gone away. 

The legacy media overreports information on stock markets (I think they do this because it's easy data to obtain, and they don't have to figure out anything innovative). You should mostly ignore this. Way less important than they make it out to be.

In anticipation of one of you asking, yes, Russia could do the same sort of liquidity flood that the Fed and the ECB will have to do. The difference is that consumers and investors on this side want our money, while those on the other side may not. This is why interest rates in Russia have gone through the roof: it's for interest on ruble deposits paid out in more rubles.

Here's a tweat storm covering the moves of Russia's central bank. There's a couple of interesting bits the journalists missed. First, if you successfully export from Russia, they want your 80% of your proceeds converted into rubles (which will put the foreign currency you obtained in the hands of the central bank to help shore up foreign exchange losses). Elina Ribakova speculates that Russians withdrew a trillion rubles from banks over the weekend. Interestingly, she also shows how Russia has created both its own alternative to SWIFT for internal transactions (in red), and a credit card for domestic transactions over the last few years (in green). Hmmm. Like they knew what was coming.

Do note that these are older numbers, and will not show anything from the past week.

Instead, expect Russia to greatly drop the price of domestic energy. The harder it is to store (like natural gas, and perhaps electricity generated centrally with it), the cheaper it will get. Coal and oil ... not so much.

This is one example of what cutting them out of SWIFT does:

Moscow’s department of public transport warned city residents over the weekend that they might experience problems with using Apple Pay, Google Pay and Samsung Pay to pay fares because VTB, one of the Russian banks facing sanctions, handles card payments in Moscow’s metro, buses and trams.

In other news, Switzerland, which is not a member of the EU, and which has been the global place for non-judgemental banking for decades, has matched the EU's sanctions, and blocked personal accounts of Putin and others. 

Our Fed this morning banned personal transactions with Russia's central bank. Those are smaller than institutional ones, and harder to trace. Good luck with that: probably just symbolic. 

Do note that natural gas is still flowing from Russia to western Europe, even through Ukraine! There's a couple reasons for this. First off, if they ship the gas, they can still accept a promise of future payment. Second, the buyers in the west probably already have some accounts in Russia to pay for things, so this is a way for Russia to drain those accounts and get access to those funds. Third, and this is a more practical problem, it's fairly hard to just turn off natural gas at the wellhead (oil and especially coal are a lot easier to leave in the ground), and it's difficult, expensive, and dangerous to store.

***

I'm not sure this one is a good thing.

The Ukrainians have been announcing tallies of Russian casualties and machinery losses. Honestly, I think those numbers are a fantasy.

BUT, over the weekend, numbers very close to that were released publicly by TASS, the semi-official Russian news agency. So maybe not.

Anyway, Anonymous took down TASS's website today.

Weekend Russian Financial News

I did the work on this Sunday afternoon, but I'm only getting around to writing it up about 1 am. With the time difference of a little less than half a day, it's already morning over there, and maybe this is old news now. My bad.

The big news is the blocking of personal assets of Putin held in the west. There is reasonable suspicion that he may be the richest person in the world (but he doesn't seem to care much for spending it). Also, it's not clear how much of his personal wealth they can actually track down. But, he did say earlier that he would consider this an act of war. At this point ... whatever.

It took a few days, but the EU has moved forward with blocking Russian banks from SWIFT. I am not sure of the details on this, but I have read that this is a minor move now: the sanctions that had been piled on one-by-one over the last few days effectively accomplished this.

A bigger move is blocking the assets of the Russian central bank. Banks hold lots of their assets in accounts at other banks, so there is a lot of traceable wealth here. Much of this is what is called foreign exchange, as discussed earlier in the semester. So blocking this is a source of future exchange rate problems.

BP owns 20% of the Rosneft (the state oil company). They're going to divest. This is dumb. You can't divest unless someone will buy. The only ones who will probably be interested will be the Indians and the Chinese. This is a moral win for the UK, but a financial loss. It will be neutral for Russia, since this is a sale of seasoned stock, not an initial offering. And it will be a win for whoever buys it on the cheap. It would be hard to find a better example of why the general public needs better financial education.

Official exchange rate markets were closed for the weekend, but were expected to open at about 100 rubles to the dollar. There was a report of spot market trades at 171 over the weekend. Not sure if that's true or not.

Russians have been hitting ATM's hard, and where possible withdrawing foreign currencies rather than rubles. Without SWIFT, and access to their accounts in foreign countries, most banks won't be able to sustain that for long. Bank runs are possible. Not sure how facile Russian authorities would be in dealing with that.

Since 1936, Turkey had followed an international treaty regarding access to the Black Sea. They are allowed to shut off access if the Sea becomes a war zone. They have announced that they are moving forward with making this claim. This is important because it would reduce Russian tanker traffic through warmer waters in winter.

But western Europe has now effectively shut off gas and oil from Russia, since they can't make payments on deliveries. But, the map shows how integrated they are:

It's probably a good time to remind you all that "green" sources ... at least as far as the numbers and scalability go ... are a joke. Europe has no backup plan here, other than tankers from OPEC and the U.S. There's probably enough oil and gas out there to fill this hole, but there may not be enough ships. This means that shutting down all the financial stuff may be a gamble that Russia will break before they do. I'm not sure Russia will lose that.

It's probable that the ECB and the Fed are going to go whole hog on regulating cryptocurrencies, just like Canada did. It will be interesting to see how possible this is. I think a lot of people are concerned that Canada showed that it might be fairly easy.

European airspace has been closed to Russian commercial planes, and it's probable that the last non-Russian flights are getting out of there at this time.

***

In all of this, you need to keep in mind that western banks have investments in Russia too. All those accounts will be locked up, and given Putin, potentially forfeited. There's likely to be financial problems here too. 

The Fed has done a pretty good job, in 2008 and 2020, with flooding the financial system with liquidity in crises. There may be a difference this time though. Financial systems can have liquidity problems and solvency problems. The former is when you can't turn your non-liquid assets into liquid ones fast enough. Easy to solve if the central banks pumps in liquidity. The latter are when you can't convert your non-liquid assets into much of anything at all, because they've lost value. More liquidity can help with that, but it won't solve the problem. I think the general hope behind all the sanctions is that Russian financial institutions need ours a lot more than we need theirs.

Another concern is loans by western European banks to Russia and Russian firms. Those bonds are assets to those western banks, and the payments are their cash flow. Russia will quickly default on those loans. What happens to those banks? Of course, the European Central Bank can flood them with liquidity, but this is also is a solvency problem on the horizon.

Cyberwar News

No one knows what the macroeconomic consequences of this will be, since it's never happened before.

Of course, the combatants and other countries are probably doing some things in secret. Who knows what though.

But this is interesting. For years, there's been a loose international hacking group called Anonymous. They announced on Thursday that they were going to be attacking Russian sites. Early on Saturday, The Jerusalem Post (one of two big Israeli news organizations) announced the 6 Russian government sites (including the Kremlin, and the Ministry of Defense) were down, and that hackers were claiming responsibility.

News Is Still Good About that Car Carrier (Not Required)

More from our Bloomberg terminal ...

The weather calmed, and they were able to get a salvage crew on to the Felicity Ace on Friday. It is now being towed towards the Azores (there's no port big enough for it there, but there's probably calmer water, and a fairly big airport nearby to get stuff in and out).

There is no longer any smoke.

Volkswagen, the owner of most of the brands on the ship, announced that they "fear that all" 4,000 or so cars are a total loss. Four hundred million dollars is the value that's been settled on as a guestimate of their value. That seems on the high end to me, and even if there are a bunch of Porsche's and Bentley's on board, it tends to suggest a lot of the more expensive electric vehicles.

That is a loss to the bottom line, so that makes this comparable in size to the ballpark for profits lost from the Ambassador Bridge blockade.

No doubt they are insured, so VW probably won't take the whole hit. But I've only heard of one insurer being on the hook, and that's for about $155M. Just like on your auto or car insurance, there can be deductible and copays on this sort of thing. And if insurers have clauses about product safety, they may decide that the cars self-combusted (my suspicion) and refuse to pay.

If you're watching this one, also be on the lookout for the phrase "self-insured". That means for both VW (and you) that you shopped around and decided that the insurance was too expensive and decided not to buy it because ... you know ... "what are the odds?" If that's the case, imagine being the VW executives who made that call.

Friday's Russian Financial and Economic News

I spent some time on our Bloomberg terminal around lunchtime on Friday, but then got tied up in other things, so this news is 24 hours late. 

The price of those Russian CDS's went up to 917 on Thursday evening, but they were back in the 500's by Friday. Either way, it's several time what they were just the other day. For comparison, CDS's for Canada's debt were at about 16 before the truck protests, and peaked out at just under 23 last week.

The exchange rate seems to have stabilized, and was at 83 to the dollar when I looked. 

The oil prices that I quoted on Thursday were all I could get from publicly available stuff at home (and the main reason I went to use the Bloomberg terminal). I had quoted a price for ESPO, which is oil delivered by pipeline (and I think, mostly to China). It was up to 102, which is actually good for Russia. The thing is with a pipeline, is that it can be shut off at either end, but if it's flowing the price will broadly match what's available elsewhere. 

Tankers, on the other hand, have to cruise into a (broadly defined) war zone, and be insured for that. For that sort of thing, you want to look for bids and asks, and you really need the Bloomberg terminal for that. Crude oil comes in many different varieties and qualities, but prices tend to follow two standards that are available in high volumes: WTI and Brent (West Texas Intermediate, and Brent which is from the UK side of the North Sea). Prices of other forms of crude oil are sometimes shown by the barrel, and sometimes by the discount from WTI or Brent. Here's the thing: Russian crude to be loaded on tankers in about a week was being offered at an $11.60/barrel discount, and there were zero buyers. Russian crude that was already on tankers was not being bought readily, but when the asks got low enough it was being snapped up by refiners in India. Not surprisingly, India, which has rotated onto the UN security council abstained from voting to condemn Russia (along with China, and the UAE).

Financial Wrap-Up On Russia

I showed the first two things in class, the third one is new.

The ruble-dollar exchange rate has dropped slightly since class to 86 to 1. That's still almost 10% worse than a few days ago.

The price of CDS's for Russian bonds continues to climb. It's up to 343 now.

Russia is offering discounts on oil of about $10/barrel. Internationally, the price of of crude oil is up to as much as  $104/barrel. Russia exports 2 grades of crude oil: higher quality SOKOL (similar to oil from Texas that's used as a standard), and somewhat lower quality ESPO. While price reports are delayed, current prices for those are 101 and 97. Prices are usually quoted at time of delivery to some (often remote) location. American crude oil prices are lower, because it usually isn't being shipped very far.

Keep in mind that these are all spot prices, which vary by the second.

Interesting Financial Development Regarding Russia

The Financial Times is reporting that the UK, which has been amongst the more bellicose supporters of Ukraine, proposed kicking Russia out of SWIFT.

That's a new level for sanctions.

It's reported that Germany indicated they would not support this move. 

It would definitely require a lot, if not all countries, to agree to do this.

***

You probably don't know what SWIFT is.

SWIFT is the international organization that transmits secure messages from one bank to another. Mostly, this is orders that funds be transferred from one account to another.

It's then the banks responsibility to actually do the transfer.

It's hard to tell how critical SWIFT is, but almost all international transactions go through it. So blocking Russia from using SWIFT would be tantamount to disabling every Russians credit card. Gee, that might get some attention.

On the other hand, it's also why Germany would be against it: if they can't pay Russia for natural gas, they won't have much to run their power plants.

That Ship Fire

There was a new official statement today. It included this:

 ... Still assumed to remain on fire drifting south ...

Read between the lines. "Assumed" means they don't know.

A Tiny Piece of Geographic Trivia Regarding the War In Ukraine (Not Required)

There are reports that Ukraine is also being attacked from the west.

***

When the Soviet Union broke up, 15 of what were called Soviet Socialist Republics (collections of ethnically similar provinces called oblasts) separated into countries. What we now call Russia is just one. 

What was the Russia before the revolution in 1917 is considered to be an empire, because it contained captive nations that might perhaps have liked to be independent. The Soviets added more during and in the wake of World War II.

One of those new countries is Moldova. It's sandwiched between Romania and Ukraine.

Romanian is a language spoken in that part of the world. There are several dialects corresponding to medieval principalities. Most of these were conquered by the Ottoman Empire, and held captive for centuries. The character of Dracula is based on a Romanian leader who fought the Turks in the 15th century.* Moldovans speak one of those dialects.

Romania is a country cobbled together in the 19th century, as the Russians slowly disassembled the northern parts of the Ottoman Empire. In the spirit of 19th century nationalist awakening, the goal was to eventually encompass all the Romanians in their own country. Not sure of the reason, but the Russians kept what was known as Moldavia as a Romanian speaking part of their empire.

During World War I, after the Russians collapsed, the Germans occupied lots of former Russian territory, including Moldavia. After World War I, Romania, which fought on the Allied side, got to keep Moldavia and some parts of Russia too. In the early part of the next war, when Germany and the Soviets were friends, the Soviets took it back. When the Nazis invaded the Soviet Union, with Romanian troops as allies, they gave it back to Romania again. Not surprisingly, the Soviets took it back again after the war. 

Since 1991 it's been independent. Sort of. Mostly.

***

Here's the thing. The Moldavian Socialist Republic included some land on the east side of the big river in the region, the Dniester. That area had more Russians living in it.

When the Soviet Union broke up, the people on the other side of the Dniester didn't want to join Moldova. And they fought a hot little war from 1990-2 in which the Russians finally took their side.

So for 30 years there's been this land-locked thing called Transnistria,† which no one recognizes as a country‡ (other than 3 other bits of land the Russians tore off of other countries and declared independent). But everyone has to deal with it, because it's not Moldova, and it's separated from Russia by ... you guessed it ... Ukraine.

Anyway, the Russians have troops stationed in Transnistria, and someone there is firing missiles at Ukraine too. Russian soldiers? Transnistrians? Both? I'll bet you that if there's ever a peaceful end to the current conflict, that it includes giving some of Ukraine to Transnistria so that they have an outlet onto the Black Sea.

* In Ghostbusters II, the fictional reincarnation of Prince Vigo claims many titles, include "the Sorrow of Moldavia". Who knew that bit of childhood trivia would come up in macro, right?

† Transnistria came up in this class several years ago. It's noted in some older editions of my Handbook that Moldova's GDP does not include Transnistria, which seemingly is counted by no one. A student had done an LDS mission in Moldova, which still claims Transnistria (technically, but has no effective control). The rule they were taught was to simply not cross the bridge into Transnistria. It's considered to be outlaw/gang territory for Moldovans.

‡ My son told me last week that in Transnistria they actually claim that they are the only region that didn't agree to the break up of the Soviet Union, and that this makes them all that's left of it. Gee, that view must make them really popular.

More Game Theory, from the Ukrainian Perspective

Ukraine is not playing a prisoners' dilemma with the U.S. and NATO. 

A prisoners' dilemma is one in which the strategies are chosen and revealed simultaneously.

Instead, Ukraine is playing a sequential game: one side moves first, then the other. Because Biden didn't do whatever (to prevent this), Putin is forcing Ukraine's hand. But again, because of inaction on our part, Ukraine gets to move first in a game with us.†

Now, the situation on the ground is unclear. But to the extent that Ukraine doesn't attack, merely defends itself, and looks like the victim ... they are limiting the viability of a strategy (on the part of NATO and the U.S.) to do little and hope the whole situation resolves itself. By playing the victim, they encourage us to act so we don't look like jerks.

Sorry if that makes you more worried.

† Please note that I'm not taking sides here. I'm not sure what Biden should have done differently either. I'm just stating what should be obvious:if they didn't want Putin to attack, and he did, then they should definitely have done something different.

Trying to Understand the Possible Responses to Russia

BV, an SUU alum, army veteran, current reservist, and student from this class about 10 years back texted:

So...how bad do you think this Ukraine thing will get? 

[Mutual friend] quit the army effective 2/11 and I'm in a non deployment unit ...so I think the worse that could happen on my end is a stateside deployment assisting actual fighters leaving. 

I guess what I'm getting at is that I trust the government and army to make the worst decisions regarding this.

Quoted with permission.

That's not very hopeful now, is it?

***

This is a good point to review the prisoners' dilemma. (I have mentioned that on this blog a few times over the years, if interested go to this page, and then do a CTRL+F to search for the term in the posts).

The quick explanation of the simplest explanation is:

• 2 players are playing a game
• They each have 2 strategies
• Outcomes for both players are determined by interaction of those 2 strategies.
• They choose their strategy in isolation from the other player.
• There are lots of games like this. The prisoners dilemma describes situations where if both players make their best choice, they both get their worst outcome.

Sounds like starting a war, and how to respond to it, right?

Anyway, economists have worked out the conditions under which the worst outcome is the equilibrium of the game: players will end up at it without trying to.

***

BV's last paragraph is why we stay on top of these things in macroeconomics.  Prisoners' dilemma situations are very common in macroeconomic policy. 

In the real world, people often describe this as "______ happens".

As macroeconomists, we need to be aware that weird outcomes or sometimes inevitable, and often difficult to foresee.

Another Insight to the Coase Theorem and the Situation in Canada (Required)

Earlier, I remarked that the truckers increased transaction costs for trade with the U.S. 

This isn't a positive thing, but one response to that would be to note that if they increased costs by X, then any negotiation that cost less than X and got rid of those costs would be beneficial.

Instead, the government of Canada spent Z to impose transaction costs of Y on the truckers and their associates.

I noted earlier that X is a flow variable, so it's loss is largely permanent. 

Total costs to Canada are then X+Y+Z. 

It's hard to see how that's a good thing.

One way to do so is to use game theory to view this as a repeated game. If Trudeau's government did not spend Y, and incur costs Z, would there be more protests in the future (or a continuation of this one) with costs that were many multiples of X? Quite possibly. But that's all the more reason to see X as the budget for successful negotiation.

***

Ballparking again. What would be the cost to compensate unvaccinated truckers for 2 weeks of quarantine (not that anyone seems to have proposed such an obvious thing)? I'm guessing they make about $100K per year, so say $4K per quarantine. That would cover 75K quarantine events. There's actually very good data on loaded truck transits: 1.1 million over the Ambassador Bridge each year. That works out to 75K in about 3 weeks. But the reports are that 90% of truckers are vaccinated and aren't required to quarantine, so it's more like 8 months worth of unvaccinated truckers.

So, let's get this right, 1 week of blockade imposed the same costs as a (fairly humanitarian gesture) of compensating affected truckers for 8 months. And this is what the government of Canada chose not to do. 

I think the Robert Burton quote applies here. This is "penny wise, but pound foolish".

***

FWIW: I'm vaccinated and boostered. I think it's dumb not to be. But I don't think the phrase "this is something reasonable people can disagree about" is strong enough here. Reasonable people should disagree about this sort of thing. But they should also be able to compromise.

Canada Update (Not Required)

After Parliament approved making the Emergencies Act permanent this week, Trudeau is saying he is rescinding it. I'm not really sure how the politics of that work.

About 200 arrests were made. Over 115 vehicles were towed. There is no good information on how many financial accounts were blocked or seized, but it appears to be in the hundreds.

In Ontario, 12 trucking firms have had their business licenses suspended, with orders to seize all their vehicles. Plates were also suspended on 24 passenger vehicles (not sure if they were towed).

Further, 27 trucking firms from outside Ontario have had their licenses to operate in the province rescinded, with orders given to police to seize their trucks if they enter the province. For those not familiar with Canadian geography, you can't cross Canada without going through Ontario. In addition, 34 passenger vehicles from outside Ontario ... hmmm ... had their plates suspended, but I'm not sure about that. Something happened to them that was newsworthy, but what it was isn't clear.

Donors to the truckers were doxxed on Google. For several hours, a map showing their names and home addresses was available online. Reports are that it showed 90,000 addresses for donations as low as $10. One should note that donations were legal until they weren't. The underlying information was hacked from crowdsourcing websites.

Silence On that Cargo Ship

There has been no official statement about the fire on the Felicity Ace since Tuesday. 

That's probably not a good sign. The ship's owners have an official site where they've posted press releases daily. Why stop if things are improving?

Locally, there are reports that the ocean was too rough today to do much other than let it drift. The salvage crew that's supposed to be dropped onto the ship is expected to be in the area by Thursday.

Reuters released this photo today:

This is the first time we've seen the port side of the ship, and to me that looks like a pretty large hole burned right through the steel side of the ship.

Shooting War Has Started

There are early reports that the Russians have attacked Ukraine around the local sunrise.

Market Signals About Russia

Russia isn't playing nice.

This makes institutions and people with mobile capital nervous.

If holders or rubles (mostly Russians) want to get rid of them (to move wealth out of Russia) they will offer more rubles for (say) dollars. By the same token, if people with wealth denominated in other currencies are less interested in Russia, they'll demand more rubles per dollar too. The exchange rate has gone from 75 to 81 rubles per dollar over the last 10 days. It bottomed out around 70 in late October, and has been heading upward since then. I don't recall exactly when Russia started ramping up threats against Ukraine this time, but it was before Christmas.

In finance, a CDS is short for Credit Default Swap. I won't get into the details of how these work, but basically they're a way to insure yourself if you hold a government's bonds and are worried about them defaulting. Buyers of them want to insure, and sellers are willing to sell them now in the hope that the default never happens. Increases in their price either means a lot more people want to insure against a default, or that it's getting harder to find sellers willing to insure your risk. The price of CDS's for Russian bonds have been going up too (24% in the last week alone). This indicates that people who own Russian bonds (for whatever reason) and holding onto them, are marking sure they're have more insurance.

Cargo Ship Fire (Not required)

Here's the official site from the ship's owner.

The official press statements indicate the fire is still burning, and a salvage team has not boarded the ship yet.

Here's an incident report from a firm that supplies information to insurers, including a map. They indicate that the fire started in a cargo hold, which again points to the cars themselves as the thing that's burning.

***

Less official information is that the ship carried 3,965 cars, worth about $500M.

A Reuters report quoted the captain of the port in Faial, Azores, as saying that the lithium-ion batteries were “keeping the fire alive,” and that “traditional water extinguishers do not stop lithium-ion batteries from burning.”

***

I'm walking back what I said about containers. That's a way to size a ship. But now that we can see the ship up close, it's clearly a drive-on-drive-off vessel, and not a container carrier.

Could not confirm what student brought up in class today: that the fire is out, and the ship is being towed to the Bahamas. I found that flames are no longer visible, and that it might be towed to the Bahamas. I wonder about that: The Bahamas is not a country known for ship salvage. These reports are coming from an interview with a harbormaster in the Azores, and I wonder how informed he really is. It's really unlikely they'd be able to handle a ship that size in the Azores though.

Is That ... Kanye? (Not Required)

Thought you might be amused by this:

Ballparking for Applying the Coase Theorem to the Situation with Canada

The implication of the Coase Theorem is that involved parties will deal with externalities if the stakes are high enough or the transaction costs are low enough.

In the case of the freedom convoy blockades in Canada, one would hope that the governments of both countries had done the following sort of calculation. I tend to doubt it.

***

Annual trade between the U.S. and Canada is roughly $600B/yr. in our dollars. That's a revenue figure, not a profit figure.

About a quarter of that goes over the Ambassador Bridge, so that's $150B/yr.

That bridge was blocked for about a week, so that's $3B.

Profit rates for firms are in the range of about 10% or revenue. So that's about $300M.

***

Here's the thing, These are all flows. 

The distinction about why flows are important is underutilized in macroeconomics, and is more or less ignored by governments.

When you interrupt flows, you don't get that back. A flow may recover to what it was before, but in order to recover the interrupted part of the flow, it has to flow faster for a while. That usually does not happen.

If you're not sure about this, think about getting ill. The work time and effort you lose is not usually made back. Instead, you push many things back, and skip others. Economies work the same way.

***

The Coase Theorem implies that the two governments had a cushion of about $300M to negotiate with to get the bridge open.

I have a hard time seeing that they took advantage of this.

That's an opportunity cost that's a net loss for both countries. There has been some attention paid in Canada to the enforcement costs. Estimates are in the low tens of millions.

Ballparking this way exposes the stupidity of the response taken by the Canadian government.

***

N.B. I'm not saying I'd respond any differently if I was in their position. Nor do I know if negotiation would have worked. I am saying that a good macroeconomist should be able to point this out.

Canada Situation (Not Required)

Hopefully this is the final post on this situation.

Heavily armed local police moved into downtown Ottawa late last week. Arrests. Towing and impoundment of vehicles. Financial accounts blocked. Numbers for all of these are in the low to mid triple digits. A few incidents of police violence. This morning, bail is being denied for some of those arrested.

Live video of downtown Ottawa shows few pedestrians or cars. Police barricades all around.

The Emergencies Act invoked by Trudeau last week had a time limit. This morning Canada's Parliament passed a bill to make some of the temporary measures permanent.

SPECULATION: The Biggest Environmental Disaster In History May Be Unfolding Right Now

(Personal disclaimer at bottom).

There's a cargo ship on fire in the mid-Atlantic. It's been on fire since the 16th.

It's also adrift. It's crew was completely evacuated very quickly. That's ... odd.

Firefighting ships are on their way to fight the fire. They are expected to arrive on Sunday.

The most telling clue is that the ship is not leaking fuel. Cargo ships run on something called bunker fuel. It's a fairly heavy, nasty, oil, stored in tanks around the perimeter of the ship, often below the waterline. Ships in trouble always leak oil. It's ... odd that this one is not.

The ship is big, but not huge. It's rated to carry 6,400 cargo containers.

It was loaded in Germany, and what we know is that a lot of that cargo appears to be cars. Figure up to 6,400 of them. VW has confirmed that it has roughly 4,000 cars on the ship. There are about 200 Bentleys confirmed too.

***

Here's the speculation.

Why would  ship be on fire? Why would it's crew evacuate almost immediately, and completely? Why would there be no oil slick indicative of a hull breach?

I suspect the ship may be loaded with electric cars, and they had a battery fire in an interior cargo hold that they could not control.

*** 

Here's the thing. 

Batteries, particularly ones designed to deliver a lot of power, like those in cars, are capable of spontaneous combustion, but can also be ignited by surrounding fires.

Batteries burn very hot. Contemporary rechargeable batteries contain alkali metals that are capable of continuing to burn under water. In fact, their fires can't be put out with water. For large ones, in confined spaces, you typically drown them in carbon dioxide (or powders, like sand and graphite).

Electric car batteries complexes often weigh 1000 to 1500 pounds.

Batteries are also a much bigger environmental hazard than most people recognize. "Lithium" batteries require cathodes that are not lithium, and depending on the manufacturer contain cobalt, manganese, nickel, and aluminum. Cobalt is toxic to plankton. So is nickel.

Where are they going to get a volume dry ice or sand, that's a significant fraction of the size of a container ship, to dowse the fire, in the middle of the ocean?

And, if not, how long until the hull gets hot enough to breach, and it starts pouring cars onto the abyssal plain?

***

Do note that while there is media coverage of this, there's not going to be much interest in a container ship fire if they can't get out to see it. Cargo ships sink on the high seas every year or two, without much media attention.

Without minimizing the issue, oil spills related to shipping get excessive coverage because 1) slicks float and are visible, and 2) charismatic fauna are harmed.

Also note, no one is going to pay much attention to the pollution if it's in international waters (all seagoing ships routinely dump in international waters without much media attention).. Not much better, few are going to pay attention to the pollution if its in the maritime exclusive economic zone of ... Portugal.

***

Disclaimer: I am not a car nut, but I love electric cars. I am all about acceleration and electric cars deliver. And while I'm informed enough to know that they don't reduce pollution, but rather just relocate it from the tailpipe, I do think they're a good idea in the western part of the Americas, where the mountains run north-south.

Canada Is the United States' Largest Bilateral Trading Partner (Required)

Canada is hugely important to the U.S., which explains my interest in what is mostly an internal Canadian series of protests.

But international trade is a funny thing to get your mind around. Most casual analysis is misguided. So first let me present 5 ideas that goof up our thinking when we look at the numbers, and then I'll consider ranking bilateral partners.

• What we call international trade, within GDP, is pretty arbitrary. It counts anything that crosses borders as international trade, and anything that does not as ... well ... um ... there's actually no accepted name for that. Except that it's the bigger form of trade for most countries. Which is just totally weird. 

Most of you probably grew up with a globe or atlas around the house somewhere that had a map like this in it:

But I chose this one because it's also weird, but in a particular sort of way. It's not that the countries aren't colored, it's that the subdivisions of one country are also shown. Ours. And its internal borders are presented the same way as the rest of the world's external borders. 

And what we do in our measurement of international trade is say that trade that goes across one kind or border should be counted one way, and trade that goes across another sort of border should not be counted that way.

The beautiful thing about this map, for me trying to make this point, is that another way of saying that is that trade that goes across some of the white borders is counted as international trade, and trade that goes across some of the white borders is not counted as international trade. If you feel that's starting to be capricious and confusing ... well good ... you're on your way to thinking more clearly about international trade (and also understanding why others get so goofy when thinking about international trade).

• This one is easy. We trade more with people that are near us. It's cheaper.† There's a reason almost every country in east Asia is a big international trader: neighbors, and lots of them.

• Next up, everyone trades the most with people that are like them. Now, it is trade, so the most important factor is being of comparable income. But after that, speaking a similar language, practicing the same faith, inheriting similar institutions from countries that occupied both partners in the past, and even skin color will influence who trades with whom. There's a reason that western European countries trade more than eastern European ones.

• A lot of international trade in goods is transshipment. This means it goes from one country to another, through a third one. So first it is exported from country A, and is an import to country B. Then country B exports it to country C where it's considered an import. There's 2 trades there (A to B, and B to C), that create 4 entries in the tallies for volume of international trade (exports from A and B, and imports into B and C). So, Belgium has a lot of routine commerce that gets counted as international trade because it's flat, and on the way from Germany to France.

• Weather still matters. Bad weather inhibits trade. Infrastructure still matters: better ports, airports, railways, and highways mean more trade. China has great natural harbors, bordering on calm seas, so it would only be a mystery if they didn't trade a lot.

• Now combine the above five points, and consider that the U.S. is considered by most to be a country that is not engaged enough in international trade, even though it's also the largest trading country (or has recently been passed by China). Why is that so? The latter part is easy: the U.S. has a much bigger economy than most countries so we do a lot more of everything. 

But even that is not as much as some think it ought to be. This is actually pretty easy, once you get introduced to the 4 points made above. First, the U.S. is physically big, especially east-to-west. So a lot of our trade is intranational rather than international. Second, we don't have a lot of neighbors. Just Canada and Mexico, and maybe a few island nations. Third, one neighbor is like us (Canada), but we have pretty significant differences from our other neighbor (Mexico). Lastly, we don't benefit from much transshipment. Yes, Canada and Mexico do trade a bit, but a lot of that goes around us rather than through us.

Put all this together, and you should start to recognize that, say, California's most important trading partner isn't China or Mexico ... its ... Arizona. And then continuing on, Arizona's big business is never going to be international trade, but rather domestic transshipment along I-10 and I-40.

FWIW: This should also make you consider whether politicians and business leaders in Utah who promote international trade are, quite possibly, morons. (Or maybe they just like international trade junkets).  We're in the middle of the country: Utah's natural business is intranational trade, especially considering we have the main northeast to southwest highway and railway routes in the western half of the country that can save time by cutting diagonally from the midwest to southern California. Also note that we're already blocked out of that trade from the northeast, because south central states have already figured out how to make it cheaper to get from NY to LA.

***

All of this means that we should be super jazzed that Canada is not just our largest trading partner, but that we are the largest bilateral trading pair in the world. The top 30, according to the WTO, are listed on this Wikipedia page.

But the data in the table is dodgy. The top entry is Germany trading with the EU. But that's weird because Germany is part of the EU. If they're going to count this as international trade, then they probably ought to count the trade of California with the other 49 states. But they don't ... because people get goofy about trade. So if they want Germany in the table, maybe they should have all the other countries in the EU entered individually, rather than as a group. But if you look closely, almost all of the entries are one EU member with all the other EU members. This is the way the WTO does it. Go figure.

And, there's also weirdness with The Netherlands being in the # 2 spot, and Belgium in # 6. This is due to infrastructure and transshipment. Both have huge, and better ports, than neighboring Germany and France.

What we're left with near the top is the U.S. with Canada, the U.S. with China, and the U.S. with Mexico (those last two have flip-flopped places over the last few years). This is kind of amazing: China has 13 times the GDP, and 42 times the population of Canada, and yet we trade more with Canada. There's good reason for that: they're close, and they're like us. But it's an amazing thing that it swamps those other factors, without much help from transshipment, good weather, and worthwhile sea routes.

Further, most of that trade goes through a limited number of entry points: over bridges near Detroit, over bridges near Buffalo,  I-81, 87, 89, and 91 in the northeast, I-5 north of Seattle, I-15, I-29 (and a lot of rail traffic through that region down to Chicago).

So paying attention to what happens in Canada is really important for an American trying to understand our macroeconomy.

And, we shouldn't be thinking of this as trucker protests over COVID-19. That's the way it's presented in the media, and it's rather infantile. The bigger picture should get the headline "World's Largest Trading Partnership Crippled by People On Both Sides with Reasonable Worries Who Should be More Open to Compromise".

And this is a good time to introduce the Coase Theorem. One implication of this is that in the presence of externalities that reduce gains from trade, interested parties should be able to figure out a way to negotiate contracts and payments to mitigate those externalities and harvest those gains from trade. How so? People and firms whose business is disrupted by the demonstrations should be trying to figure out who needs to be paid off to make them go away. In this light, the truckers do not have too much to gain or lose, so the obvious bargaining partner is the Trudeau administration. That the Trudeau administration hasn't figured this out points to political incompetence on a grand scale.

† But it's really not that much cheaper. Shipping across oceans is remarkably cheap (all those people who think buying at farmer's markets is beneficial because there's less transportation are really off base). There's been a huge increase in the cost to ship a container by ship: it's up to about $10,000 right now, a bit less than 4 times what it cost before COVID-19 hit. That's still only about $4 per cubic foot. A new laptop in its box is about 2 cubic feet, or $8 to ship from China.

Today In Canada (Not Required)

Around 5 pm local time, protesters in Ottawa started getting arrested. Earlier it was announced that children and dogs would be taken from those arrested.

Ottawa has now had 2 interim police chiefs resign after the regular one did on Tuesday. One, hired from another city, quit without arriving in the city to assume the job, and blamed apparent lack of support from the city's council.

A reporter, claiming to be from the Salt Lake Tribune, has been using the hacked and doxxed information about donations to contact people with Utah addresses to ask about their motivations. Can't confirm this is from a real reporter. 

There is more context to the Canadian Minister of Justice's veiled threat against financial donors. The more complete quote is " ... If you are a member of a pro-Trump movement who's donating hundreds of thousands of dollars and millions of dollars to this kind of thing, they oughta [sic] be worried." That's awfully specific. We're only talking about $15-20M in total (that's an estimate), and you just can't have that many donors in the 6 to 7 digit range specified. I'd say they have evidence that a whale is financing most of this.

***

There's a small amount of evidence (but more than last night) that a bank run in Canada may have been averted.

First there's this showing a huge increase in the number of reports of online banks being down:

Canada really only has 4-5 banks, so this is pretty much the whole banking sector, all offline, about 10 pm EDT. There were also reports of ATM's not functioning at this time.

And there's also the huge increase in internet searches for the phrase "bank run" last night:

You might have to scroll to the right side to see that.

Having noted this, some people noted online that this would also be consistent with the installation of software dictated by the government for a certain time. No evidence of that, but it's plausible.

Canada Coverage Trivia (Not Required)

A twitter site that I use to get information from the anti-government side has been shut down. I wonder if that's due to financial steps taken by the Canadian government.

Good News: Canada Has Been Pretty Quiet (Not Required)

The situation(s) in Canada seem to be quieting down today.

Truckers are still in Ottawa, but not blocking downtown. Police are threatening action, but not taking any.

On Tuesday, truckers disbanded their blockade at the I-15 border crossing. This followed the arrest of 13, and the charging of 3, for weapons violations and conspiracy. Both the truckers and the RCMP believe this was a small cell within the group, and not representative of the whole. Truckers averred that taking down the blockade was a good faith effort on their part.

Canadian banks are in discussions about how to proceed after Trudeau's government indicates they have been deputized to identify problematic financial donations. There are anecdotal reports that some accounts have been closed. Everyone is confused about how this applies to banks that operate on both sides of the border, people and corporations who have accounts on both sides of the border, and people with dual citizenship.

Canada's Minister of Finance specifically singled out people who may be a "... Member of a pro-Trump movement who's donating ...". We're living in interesting times: I have no doubt that there's a real issue here, but this would have been regarded as a serious diplomatic breach not that long ago. In most contexts, the principle of Westphalian sovereignty still applies: government officials in one country are not supposed to harass private citizens in another country.

There are bank run rumors on the internet, (and confirmed simultaneous outages of online banks on Wednesday evening). Lots of debate about how credible these are. This misses the point: all bank runs start as rumors, it's the spread of rumors and acting upon them that's the problem. It does not seem like this is going to be a problem at this point.

As near as I can figure, this is true. A letter has been signed, and sent to Trudeau and Biden, demanding a reconciliation of vaccination rules on both sides of the border. The signatories include 2 Canadian Provincial Premier's, and 16 U.S. state governors ... including Utah's Spencer Cox. Interestingly, there's a contiguous block of those governors' states in the intermountain west and plains that depend on border crossings from I-15, I-29 (I mistakenly called that I-35 in class), and I-25 which ends before the border but feeds traffic to the other two.

About the Size of Those Canadian Provinces (Required, Unlike the Others)

Canada is rich, and comparable to the U.S. in real GDP per capita. But it's population is a ninth of ours, so those provinces that are big on a map are not that comparable to our states.

First off, the entirety of Canada has an economy about the size of Texas (our # 2 state) with West Virginia thrown in to make it even.

This site gives the real GDP of Canadian provinces in their dollars. The exchange rate currently is about 4 of our dollars to 5 of theirs, so it makes sense to deflate their numbers by 20%. Here's what we get in U.S. dollars:

• Ontario, about $710B/yr., or between the size of Georgia and Ohio.
• Quebec, about $370B/yr., or between the size of Missouri and Wisconsin
  
• Alberta, about $280B/yr.,, or between the size of South Carolina and Connecticut
  
• British Columbia, about $250B/yr, or between the size or Alabama and Louisiana

Those are the big 4, and I didn't worry about the rest. For comparison, Utah's GDP is about $220B/yr.

About Those Federal Law Enforcement Agencies: United States vs. Canada (Not Required)

In class I mentioned that the U.S. has a lot more federal law enforcement in the hands of the central government than Canada does.

How to compare them? I have no idea ...

But I did look it up on Wikipedia! And while there are many agencies large and small, for the U.S. the list runs to 9.5 pages on my browser and screen. For Canada, the list runs to 16 lines on a single page. One could also reasonably expect that because the U.S. has 9 times Canada's population, each of those agencies has more staff.

So I think it is fair to assume that part of the paralysis in Canada is because the demonstrations are aimed at the federal government, and it's just not that strong.

The Plot Thickens In Canada 3 (Not Required)

Prime Minister Trudeau was heckled in Parliament after tweeting "We’ll always defend the rights of Canadians to peaceful assembly and to freedom of expression."

Most of the truckers gumming up Ottawa have moved to less central parts of the city. 

It's now clear that the OPP and RCMP are taking over police activities in Ottawa, so that's probably why the police chief resigned.

There are protests in New York City outside the Canadian Consulate.

There are new protests in Calgary, Alberta.

CBC is the taxpayer supported national TV station in Canada. They have been contacting people who donated cryptocurrency using email addresses provided by hackers. That's so weird it's hard to write a description in succinct sentences.

***

Again, not including links so as not to overload you with stuff that I do not know what to make of. At. All.

P.S. Just had the horrible yet amusing thought that I bet Turkey's Erdogan is glad the Canadians are drawing attention away from him ;-)

The Plot Thickens In Canada 2 (Not Required)

Sheesh. I missed this one from yesterday.

The video is cued; I'll summarize below, but the important 2 minutes are right there if you want to watch.

The woman speaking is Canada's Minister of Finance and Deputy Prime Minister Chrystia Freeland. She is acting under authority of the Emergencies Act mentioned 2 posts back. Here's the money quotes:

"... These changes cover all forms of transactions ..."

" ... Highlighted the fact that crowdfunding platforms and some of the payment service providers they use, are not fully captured under the Proceeds of Crime and Terrorism Financing Act ..." (see this page of search results for some explanation)

"... We know that these platforms are being used to support ... activity that is damaging the Canadian economy ..."

"... A bank or other financial service provider will be able to immediately freeze or suspend an account without a court order. In doing so, they will be protected against civil liability ..."

"We are today serving notice, if your truck is being used ... the insurance on your vehicle will be suspended ..."

"The Canadian economy needs them [semi-trucks] to be doing legitimate work, not to be illegally making us all poorer ...".

I have never heard anything like this in a rich/developed/Western country.

I am not an expert, but I believe that doing these sorts of things in the U.S. would be a violation of the 4th Amendment  (seizure of your funds without due process), and the 1st Amendment (abrogation of freedom of association if you're a suspect); while deputizing private institutions as a posse comitatus to  police activities pronounced as undesirable by the government is the same logic used here to perpetuate and expand slavery before the Civil War.

The closest thing to this is the suspension of accounts in Cyprus in 2013, which ended with a lot of people having their money confiscated (which was probably a good thing, since a lot of it was ill-gotten). There are a crazy number of links on this blog from back then as that crisis evolved (see here).

***

Part of me is pleased that a macroeconomy is getting attention and being protected. But holy cow ...

And again, I'm not sympathetic to the protesters, although I recognize that they have a point about how policy affects their jobs.

I'm not sympathetic to the government of Canada either. It seems to me that a cornerstone of policy for a small or smaller country should be to avoid inconsistencies with your larger neighbor. That neighbor may not be right, but I think there's an obligation to be practical about these things.

Hopefully it's pretty obvious that I take COVID-19 seriously, and am not an anti-vaxxer or stealth conspiracist. 

With all that in mind, it should be clear that COVID-19 is a macroeconomic issue, that economic issues and policies often have unintended consequences, and that the U.S. inability to mitigate COVID-19 effectively (under either administration) is contributing to macroeconomic problems in other countries.

The Plot Thickens In Canada (Not Required)

CBC is reporting that the police chief in Ottawa has resigned.

There's a ton you could read into that: wasn't able to do his job clearing protesters; secretly siding with protesters; received an order that he could not follow in good conscience.

Do note that, even in our summer of unrest in 2020 for example, while it's normal for officials to resign after things have died down, it's pretty unusual for them to resign during an ongoing crisis.

There's quite a lot of information in that article, but it does note conflicts with the Ontario Provincial Police (OPP), and the Royal Canadian Mounted Police (RCMP). Those would be analogous to the state police and the FBI in the U.S.

N.B. Keep in mind that I don't have a horse in this race. But macroeconomically, I worry about instability in our largest trading partner, and neighbor, over issues related to our national situation.

Update on Canada Worries

American news coverage of the situation in Canada is kinda' lousy. You can dig (and I do), but I'm not too concerned that you do at this point (so, no links, for now). Here's some things I've learned.

• The demonstrations, now loosely called "Freedom Convoys" are ongoing.
• Ottawa, Canada's capital, is still tied up.
• There seems to be considerable grass roots support for the demonstrations (look for videos of people delivering diesel fuel to protesters). 
• The leadership of the demonstrations has been uncovered to be the fairly routine sort of anti-vax, Trumpy, conspiracy believing people we've gotten used to over the last few years. But the rank and file demonstrators do not seem to buy into most of that: they're mostly concerned about being told to do something they think is, at best, incoherent.
• The demonstrations have spread. I talked about Ottawa and the I-15 crossing last week. Then the Ambassador Bridge going into Detroit was blocked (this is the largest border crossing). This has been unblocked without violence. Another blockage has popped up on a secondary route into Washington.
• A great deal of money has been raised through social media to support the demonstrations. There is a suspicion that a lot of this is coming from the U.S. I'm not sure we should be surprised at that. While the demonstrations are in Canada, they are about both countries, and given out population is 9 times bigger, it stands to reason that interested Americans would contribute a lot of money.

OK. So here's the weird thing they don't tell you. Because of its unique evolution, Canada is even more federal than the U.S.

In this context, federal means that the second tier of government (states here, provinces there) has a lot of power. In fact, Canadian provinces are in many ways more powerful than American states. 

As to the history, some of you probably know that Quebec (the second biggest province) has come pretty close to seceding amicably a couple of times over the last 50 years. And polls show Albertans have wanted to join the U.S. for decades. 

Part of what is going on there is that the colonies that formed Canada were never united against England. So when they were united as a country (in 1867) they retained a lot of independence and direct ties to London. For example, the province of Newfoundland was still a colony until 1949.

This relates back to why the crossing into Detroit is now open. This is because Ontario wants it open, and made it so. Why? Macroeconomics: the auto industry (based in Detroit) has enormous trade relations with Ontario.† Shutting that bridge brought Detroit and Ontario to a grinding halt. And you've probably seen those memes pointing out that a majority of Canadians live very close to the U.S. border.

The crossings in Alberta and British Columbia are still closed because those provinces are more or less permitting the protests to continue. So this is a lot more nationally divisive than Americans recognize.

The central government of Prime Minister Trudeau is not powerless in all this, but is probably a lot less powerful than Biden would be in the same situation. Today, Trudeau authorized the use of an emergencies act precisely because he needs more avenues to apply what power he has.

† I grew up in Buffalo. The quicker way to get from Buffalo (and everywhere to the east) to Detroit (and many points to the west including Chicago) is to go through Canada.

Some CPI Details

CPI is a weighted index of price changes. So what are the weights? These are available from the BLS website using the keywords "relative importance of components in the consumer price index". Here's the page. 

Do note the indents, they're important: all items at the same level of indent add up to the total percentage of the category. For example, the category "All Items" is 100% of the CPI. But this can be broken down into components with the next leftmost indent: Food and Beverages, Housing, Apparel, Transportation, Medical, Recreation, Education and Communication, and Other Goods and Services. 

In turn, some of those get broken down even further. So, Breakfast Cereal is a component of Cereals and Cereal Products, which is part of Cereal and Bakery Products, which is part of Food At Home, which is part of Food, which is part of Food and Beverages.

***

There are price indices for all of those components. But it can be difficult to find them all in one place. FRED has this page which shows some before and after indices and base years for components of the CPI down to the 5th indent level (and some at the 6th). However, the amount of data underlying this table is huge, so you can't just go an download everything easily. 

Anyway, I put this into a spreadsheet which you can find in the class shared folder on Google Drive.

Just a Headline I Saw

"Tesla's China Sales Tumble 15.5% MoM After Record December ..."

Now you should know what MoM means.

CPI for January 2022

We've been working with the CPI data since last week, and noting the steady increase in the CPI inflation rate that's been going on for 14 months or so.

First week of the month gets us labor market data (from the BLS), the second week of the month gets us price level data. 

The BLS press release shows inflation (MoM) of 0.6%,  and 7.5% (YoY). The latter is an increase. But ...

Do note that the BLS does seasonal adjustments on a fairly regular schedule, but that they also do a big one for the whole previous year that comes out in the February report. 

They also do seasonal adjustments across years. Think about it, if right now they modify January to December of last year, but January (as announced a year ago) was building off the just previously revised year. Since they're tweaking this year a little, they also tweak that year a little, and so on, to eliminate any quirks they may have induced in the data. In principle, as they carry this back further and further, the modifications needed get smaller and smaller, and they are not done at all more than 5 years back.

Bottom line is that we should download the new data, and duplicate our earlier analysis with the new numbers.

***

Also, while I am grousing this month about issues with BLS deseasonalization, please keep in mind that deseasonalization is a good thing. If they do it, it's helpful. If they don't do it, you'll need to. And while criticism is merited sometimes, it's not clear that you'll do a better job than they do. What is important is that you can explain what you did to others (and they can debate it), whereas with "official" deseasonalization, we're often dealing with a black box.

Another factor to consider is that an agency like the BLS is deseasonalizing all their data jointly. So an odd adjustment in one spot is at least reconciled with all the data that relates to it. This is a big plus that's hard to duplicate working on your own with a handful of series.

***

One bit of weirdness is that the BLS makes a point of noting that the 7.5% YoY figure is based on not seasonally adjusted data. However, as I argued in class, forming a YoY is a form of seasonal adjustment; and if you're logging the levels of the data, as a difference over 12 months, it's actually a preferable form of seasonal adjustment.

The January 2022 Wage Report

A big concern with (price) inflation is if (compensation) inflation is keeping up. If it is, workers are better off. If not, they're not.†

A big component of compensation is measured by the official statistic "average hourly earnings" which also came out at the end of last week. You can find it on FRED if you're curious.

In The Wall Street Journal editorial entitled "The Wages of Inflation" they mention the January number:

The number worth pondering is the increase of 0.7% in average hourly earnings in the month. That’s a barn-burner number—9.2% at an annual rate.

Now you know how they got that.

They follow this with:

Hourly wages are up 5.7% over the last 12 months

You should also recognize how they do that, and why. It's because it's not clear that the 9.2% will be sustained over 12 months, but the 5.7% has been sustained over 12 months.

N.B. I wasn't able to exactly duplicate these numbers from a quick download, but I got with a tenth of a percent or two. Small enough for me to think I used a slightly different data set, or one of us made a tiny math mistake.

† Do note that in media and political discussions about whether or not workers are keeping up, they're unusually selective in choosing a measure of compensation that justifies that position they intend to take. For example, compensation includes healthcare benefits. Suppose their price is inflating faster than other goods in the CPI. Then there's probably a component of compensation that roughly matches that — but then everything else in compensation (like wages) will grow at a lower rate. And this is where you have to be careful: the next step is to compare (price) inflation including healthcare to (wage) inflation excluding healthcare, note that the former is larger, and assert that workers are falling behind. That is not clear from that position, and isn't even discernible due to the apples and oranges comparison, but the assertion is what will stick in peoples' minds.

The January 2022 Jobs Report

The BLS releases data on employment in the previous month towards the end of the first week after the month ends. So last Friday morning we got a whole bunch of new data, including the unemployment rate and the number of new jobs. Those numbers are kept secret from everyone (even the White House and Congress) until they're released publicly to everyone at the same time.

And everyone who pays attention to this sort of thing was ... flabbergasted. Especially with the jobs number.

The report said the jobs market was fantastic in January. For example, there's "‘I’ve Never Seen Anything Like This!’ CNBC Absolutely Loses It Over Blockbuster Jobs Report Showing Half-a-Million New Jobs"

But everyone's expectations were that it would be really bad (due to the omicron surge, which really started to hit the week before Christmas, peaked in mid-month in the northeast, and which is only peaking just now in certain parts of the country). The report was expected to be so bad that on Monday, the White House Press Secretary Jen Psaki admitted as much and tried to talk down the press pool about what to expect (follow this link, and then search in that webpage for the word "frontrunning"). Here's Bloomberg from Thursday "U.S. Jobs Data Look ‘Particularly Tricky’ on Omicron, Revisions" (Read more at: https://www.bloombergquint.com/onweb/u-s-jobs-report-set-to-be-a-doozy-with-omicron-revisions Copyright © BloombergQuint").

As to the response, it's not normal for the Secretary of Labor to have to go on the cable news shows to defend their data releases (see "Labor Secretary Marty Walsh on US job growth soaring past expectations: 'Very transparent number'"). Or for quick posts that try to explain seasonal revisions (see "Yahoo Finance VideoWhy jobs reports revisions happen and what they mean"). In "Here Is What's Behind Today's Stunning Payrolls Beat" ZeroHedge went so far as to note that the released numbers were 3 standard deviations above the mean of several dozen publicly available forecasts of how the numbers would look.†

***

The conclusion that people came to is that the data is anomalous because of seasonal adjustment (in the commonly quoted data) applied to non-seasonally adjusted data (buried on the BLS website).

Everyone likes to use seasonally adjusted data because 1) it gets rid of seasonal swings, which are often larger than the changes you're interested in, and 2) it's a lot easier to use some data that someone else did the prep work on.

But, it's a dirty little secret in time series analysis that a lot of seasonal adjustment done by government agencies is ... junk. The reason for this is continuity. When data was first getting measured, and seasonality was noticed as a problem (say 75 years ago), they passed it off to engineers (hey, you guys do math!) and computer programmers (hey, you guys fix buggy stuff!) ... who came up with non-statistical, non-economic, and non-financial ways of adjusting things. (They even named the big government seasonal adjustment program ... X11 ... which sounds impressive and stuff). Later on, time series was developed as a field (starting in the 60's). The methods they came up with for dealing with seasonality were more solid, and not surprisingly, entirely different. But governments have hung on to those older methods to maintain continuity. In short, sometimes sh*t happens in going from non-seasonally adjusted to seasonally adjusted data (NSA and SA for short). Beware.

***

But, the cool thing is, you've learned some tools over the last month that can be used to seasonally adjust data. I don't normally do this in ECON 3020, but it's a lateral shift rather than a big leap. So we'll do this in class next week.

† Hopefully you've heard in business discussions (often about quality control) the phrase "six sigma". In statistics, sigma is the standard deviation. Six sigma refers to plus or minus 3 standard deviations around the mean: an observation should fall outside a ± 1 standard deviation range about a third of the time, outside a ± 2 standard deviation range about 5% of the time, and outside a ± 3 standard deviation range ... just about never (more precisely, 1 in every 275 times).

Update: Here's a quote from Phoenix Capital Research's briefing "There's fiction ... and then there's the January jobs report". And here's one from Rabobank "You just saw history being made."

Inflation 1

We're seemingly going to need to do a lot on inflation this year, so this is just a primer to get started.

Why are we interested in this right now? Because the U.S. has started putting up inflation rates that have not been seen in 30-40 years. We are not alone in this, amongst comparably developed countries.

What is inflation? Statistically, it's a rate of change of prices.

But what prices? That depends. A rate of change of one price would be easy to figure out. But what about more than one? For this we need to take some sort of average of prices. But because some goods are more important than others, it should be a weighted average, so that each one can have a different weight.

A weighted average of prices is called a price index. There are many of these, with each including different goods and services.Some goods and services are excluded from some price indices, so their weight would be zero. For the ones that are included, the weights can be different, but should be expected to be similar: they don't just make up the weights, but instead rely on actual decisions made by buyers in the macroeconomy.

But, there's different mathematical methods for calculating indices (chain weighting is one of those). And they make a difference in the final numbers.

Also, prices sometimes go up because quality improves. In the background, good indices correct for this. But it's not easy to judge quality, so everyone is aware this may be a bit sketchy. We put up with that because there isn't much alternative to doing the best measurement job that you can. 

Another thing they correct for is changes in packaging size: a smaller package at the same price (as my daughter noted Taco Bell has recently done with their quesadillas) is a trick to hide inflation. The statisticians are on the lookout for this, but it's a big country to catch all of these.

There are many price indices, depending on statistical needs. Two are primarily used for calculating inflation for the U.S.: the consumer price index (CPI), and the personal consumption expenditures (PCE) price index. The CPI will tend to show higher inflation rates. 

A weird but important quirk that I learned about this year is that, unlike almost all other economic data series, the CPI is never corrected retroactively. When most data series are revised and updated, this is done retroactively as far back as needed. So there's an old version that ends at the revision, and a new version that overlaps it, continues forward, and is used from there on. You can imagine in the parts that overlap that there are dates when the new and old series are closer together and further apart. Not so with the CPI. With it, revision and updates are introduced, but only from that point going forward. So imagine something like line segments that touch where one ends and another begins, but which might have a kink at that point. I believe the reason it's done this way is that the CPI is commonly used in labor contracts, and if they changed the numbers retroactively after a contract was signed, one side or the other might sue to claw back some of the differences.

There are also indices for wholesale prices and producer prices. These get watched because it's thought that inflation in those will show up in inflation in consumer prices a few months later. 

One last thing: you sometimes see discussions of "core" inflation.† Price changes can be very volatile. And volatility can make it hard to spot trends. So the idea here is that if you remove the most volatile prices, what you'll be left with is a cleaner view of inflation. The most volatile prices faced by consumers are for food and energy, so core inflation means those are excluded.

† Maybe my personal biases are bleeding over into my professional viewpoint here, but I hate the use of core inflation. To me it seems like it's excluding the things that people actually notice the most.

Turkey. Again.

Over the weekend Erdogan fired the head of the nation's economics statistics agency.

The agency had recently released the official inflation rate for December: 36% per year. It's not clear which method was used to get that number, but FRED has a lot of Turkish data if you want to do a deep dive for yourself.

Unofficial estimates are that the inflation rate is more like 80% per year.

***

Stuff like this has happened before.

A former minister in charge of economics statistics for Greece lives in exile in the U.S. He's been acquitted by Greek courts 3 times for falsifying economic data (it's generally believed outside of Greece that he did a pretty good job). He still won't return to Greece for fear of summary detention.