2/6/2014: Europe in the 'Happi-Ending' Data Parlour

The EU has discovered, at last, a new source of economic growth. Just about enough to deliver that magic 1%+ expansion for 2014 that the economical zombified currency block has been predicting to happen for years now. The new growth will come not from any new economic activity or value-added, but from including into the official accounts activities that constitute grey or black markets - transactions that are often illegal - drugs, prostitution, sales of stolen goods, and so on.

The basis for this miracle is the 2010 European System of Accounts which requires (comes September this year) of all EU states to include in official GDP (and GNP) accounts all "illegal economic actions [that] shall be considered as transactions when all units involved enter the actions by mutual agreement. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not."

Wait a sec. Here's a funny one: stealing property is not a GDP-worthy activity, but selling stolen property is… It is sort of "breaking the leg is not adding to our income, but fixing a broken leg is" logic.

The rational behind harmonised treatment of grey and black markets data is that some states, where things like prostitution are legal, already include these services in GDP calculation, while others do not. Thing are, per EU, not comparable for, Netherlands and Luxembourg because of the Red Lights districts operating in one openly, and in another under the cover. From Autumn this year, all countries will do the same. And they will also add illegally-sold tobacco and alcohol

Prostitution is legal in Germany, the Netherlands, Hungary, Austria and Greece; some drugs are decriminalized in the Netherlands. Italy started to add some illegal activities into its GDP ages ago - back in 1987, the country added to its accounts estimates of the shadow economy: off-the-books business transactions which make up ca 20% of Italian GDP. This boosted Italian GDP by 18% overnight - an event that is called il sorpasso because it drove Italian GDP up to exceed that of the UK.

Poland did same earlier this year, with its GDP about to start covering proceeds from prostitution, drugs trafficking, alcohol and tobacco smuggling. Based on GUS (the CSO of Poland) estimates, in 2010 these accounted for some 1.17% of GDP.

Outside the EU, other countries are also factoring in illicit trade and transactions into their GDP. South Africa has been at this game since 2009, with GDP revised up by a modest 0.2% to take account of unobserved economy.

With 'new activities' added, Italy's GDP is expected to rise 2% in 2014, while French GDP will boll in by 3.2%, UK boost will be 'modest' 0.7%. And so on… Spain's shadow economy runs in excess of 20% of GDP. If bribes (some are voluntary, others can be extorted) are included, Europe's GDP will take a massive positive charge.

Here is the UK note on 'methodologies' to be used in estimating the new 'additions'. It is worth noting that the UK already includes illegally smuggled tobacco and alcohol estimates into its GDP, and these add some £300mln to the economy. Here is the Danish government report on the same, showing smuggling accounting for 2% of GDP adjustment. This is from 2005 when the Government adopted inclusion of some of the illegal activities into its GDP calculations. And dating even further back, the OECD guidebook on inclusion of illegal activities into accounts: here. Here is a fascinating paper from 2007 on Croatia's accession to the EU, meeting Maastricht Criteria targets and inclusion of illegal transactions into GDP.

The net result: deficits and debt levels will officially fall compared to GDP. Even private debts, still rising for now, will see rates of growth slowing down...

Of course, Ireland's Stuffbrokers have rejoiced at the thought of CSO boosting the GDP by counting in activities that can land one in jail. Per Irish Examiner report (here): "Davy chief economist Conall MacCoille said while the inclusion of the statistics might help the Government reach its deficit target of 4.8%, the activity is contributing nothing to the exchequer. “Of course we are delighted to see the CSO capture as much economic activity in the GDP figures as possible, but the fact is that this activity is not taxed. If might help push up the GDP figure, but it will not contribute anything to the exchequer,” he said."

Read: Happy times (higher GDP) could have been even happier (tax revenues boost), but we'd settle for anything that might push up the value of Government bonds... (Who's one of the largest dealers selling said bonds?...)

Thus, do expect congratulatory statements about 'austerity working', 'reforms yielding benefits' and 'recovery taking hold' blaring out of radio and TV sets next time pass the 'Happi-Ending' Massage Parlour or a methadone clinic…

Next step: Yanukovich era corruption 'activities' added to Ukraine's GDP. That should lower country CDS from sky-high 960s to Norwegian 13s… Happy times finally arriving to world's economic basket cases, riding on a dodgy stats bandwagon.

31/5/2014: One Chart of the Week, 5 charts of the last 5 years

If you see one chart this weekend, make it count. Here's a contender:

Source: https://twitter.com/okonomia/status/471713359424139264/photo/1

The above shows US GDP growth starting with the end of each recession from 1954 through the last one (where all growth indices are set at 100). And guess what: this time is different. Despite massive, un-parallel, unprecedented monetary expansion and QE, the current recession and recovery signal both - the sharpest decline from the pre-crisis peak and the shallowest recovery from the crisis trough. 

To confirm this - see the historical deviations from the potential GDP:

And this is not just about GDP. Here are changes in employment:

And unemployment:

These charts come from (except for the first one) http://www.cbpp.org/cms/index.cfm?fa=view&id=3252.

And the famous chart from the CalculatedRisk blog tracking percentage of jobs losses:

That's right... all of this 'wealth creation' in the financial markets is hardly about the real economy... Which means that one day, either fundamentals will have to catch up with financial markets valuations (by growth vastly outstripping capital gains), or financial markets will have to scale down the cliff back to fundamentals (by financial markets correcting massively to the downside). Or both... Which one is the 'soft landing'? You guess...

31/5/2014: Twitter: Promoting Isolation, Ideological Segregation and All Things Good to Your Political Engagement

A very interesting study looking at comparatives of media and news use via twitter (social media) and traditional media (print, radio and TV). The paper, titled "Are Social Media more Social than Media? Measuring Ideological Homophily and Segregation on Twitter" (May 2014_ by YOSH HALBERSTAM and BRIAN KNIGHT is available here: http://bfi.uchicago.edu/sites/default/files/research/Twitter_may232014.pdf

Some highlights:

Per authors, "Social media represent a rapidly growing source of information for citizens around the world. In this paper, we measure the degree of ideological homophily and segregation on social media."

The reason this is salient is that there has been a "tremendous rise in social media during the past decade, with 60 percent of American adults and over 20 percent of worldwide population currently using social networking sites (Rainie et al., 2012)…. Indeed, this phenomenal growth in social media engagement in the U.S. and around the world has transformed the nature of political discourse. Two thirds of American social media users—or 39 percent of all American adults—have engaged in some form of civic or political activity using social media, and 22 percent of registered U.S. voters used social media to let others know how they voted in the 2012 elections."

Per authors, "Three key features of social media distinguish it from other forms of media and social interactions." These are:

• "…social media allow users to not only consume information but also to produce information." It is worth noting that social media can also reproduce information produced on social media, as well as that produced by traditional media.
• "…the information to which users are exposed depends upon self-chosen links among users." In other words, social media produced and distributed information can be self-selection biased. The extent of this selection is more limited in the case of traditional media, where individual biases of consumers can be reinforced by selecting specific programmes/channels/publications, but beyond that, the content received by consumers is the one selected for them by someone else - journalists, editors.
• "…information on social media travels more rapidly and broadly than in other forms of social interactions. …[social media network model] leads to a substantially broader reach and more rapid spread of information than other forms of social interactions."

As authors put it: "Given these three distinguishing features, the rapid growth of social media has the potential to effect a structural change in the way individuals engage with one another and the degree to which such communications are segregated along ideological lines."


To examine this possibility, the authors construct "a network of links between politically-engaged Twitter users. For this purpose, we selected Twitter users who followed at least one Twitter account associated with a candidate for the U.S. House during the 2012 election period. Among this population of over 2.2 million users, we identify roughly 90 million links, which form the network." Based on political party followed, users were assigned ideological identifiers.

Two key findings of the paper are as follows:

1. "…we find that the network we constructed shares important features with face-to-face interactions. Most importantly, both settings tend to exhibit a significant degree of homophily, with links more likely to develop between individuals with similar ideological preferences." In other words, we do show strong selection biases in networks we form. Doh!..
2. "…when computing the degree of ideological segregation and comparing it to ideological segregation in other settings, we find that Twitter is much more segregated than traditional media, such as television and radio, and is more in-line with ideological segregation in face-to-face interactions, such as among friends and co-workers." Worse: we not only form biased networks, we also create selection-biased interactions and generate selection-biased chains and flows of content. Doh! Redux...

Conclusion: "Taken together, our results suggest that social media may be a force for increasing isolation and ideological segregation in society."

Wait… so we act on the social media base to create networks that are closer to friends networks… and this leads to… isolation?.. Well, my eye, I would have thought this would be the opposite…

But top conclusion makes sense:  "The issue of ideological segregation is important when providing such information. Exposure to diverse viewpoints in a society helps to ensure that information is disseminated with little friction across a large number of people. When a community is polarized and is divided into factions, by contrast, information may spread unevenly and may miss intended targets. Our results suggest that social media are highly segregated along ideological lines and thus emphasize these potential problems associated with the flow of information in segregated networks."

The problem, of course is: Can the selection bias be ameliorated? Can people be 'incentivised' to engage with ideological opposites? In my view - yes. This can be achieved most likely by educating people about systems of thought, logic, structures of knowledge, information. The thing is: in social networks, such education is both more feasible (volume of information delivered and speed are both higher) and probably more productive (because there is inherent trust in one's own network that is stronger than in detached media networks. Peers generate stronger bonds than preachers...

The paper has some fascinating data illustration of media biases, though - worth looking at in the appendix.

30/5/2014: Detailed Analysis of Retail Sales for Ireland: April 2014

In the previous post on Retail Sales data, I covered Q2 comparatives across the years (http://trueeconomics.blogspot.ie/2014/05/3052014-that-state-sanctioned-inflation.html). As promised, here is April data taken on a monthly frequency.

There are several very interesting developments in terms of core retail sales data released earlier this week by CSO. Stay patient as I cover it.

Firstly, from the top level:

• Current 3mo average for Retail Sales by Value index is at 96.7, which is below 96.9 average for the 3mo period through January 2014. Bad news. However, a ray of sunshine: Value Index did rise on seasonally-adjusted basis to 97.3 in April compared to 95.9 in March.
• Current 3mo average for Retail Sales by Volume index is at 102.5, which is virtually unchanged on 102.4 average for the 3mo period through January 2014. Neither bad not good news. However, another ray of sunshine: Volume Index did rise on seasonally-adjusted basis to 103.3 in April compared to 101.7 in March.
• Meanwhile, Consumer Confidence index reported by ESRI averaged 85.3 in 3 months though April 2014, which is blisteringly higher than 78.5 reading recorded across 3 months through January 2014. Bad news: on shorter 3mo average basis, Consumer Confidence continues to go boisterously where actual retail sales are not daring to move.

Chart to illustrate:

Notice the following from the chart above:

1. Bottoming out on trend in Consumer Confidence took place around Q1 2011. Bottoming out in Volume Index of Retail Sales took place around Q2-Q3 2012. Bottoming out in Value Index of Retail Sales is yet to be established, though it appears that it might have happened around Q4 2013. Thus, Consumer Confidence can at best be a weak indicator for changes in Volume and counter-predictor to changes in Value of Retail Sales
2. Consumer Confidence is rising much faster, over sustained period of time, than Volume of Retail Sales which itself is outpacing Value of Retail Sales. In other words, even massive and sustained reductions in the retail sector margins are not being able to explain in full the boisterous dynamics in Consumer Confidence.

Now onto my own Retail Sector Activity Index (RSAI), which is a weighted average of 3mo MAs for Volume and Value of Retail Sales Indices and Consumer Confidence:

Couple of things worth noting:

1. RSAI shows, finally, a breakaway from the flat trend that held the sector down between 2009 and much of 2013. This is good news. The RSAI is now at 111.0 up on 110.6 in March 2014 and on 3mo MA basis it is up from 107.7 over 3 months through January 2014 to 110.7 currently.
2. RSAI in most recent two months has been visibly slowing down in the rate of growth, despite massive rises in Consumer Confidence. This can signal some weakness coming down the road. Or it might signal temporary slowdown (remember, this is seasonally-adjusted data).

Lastly, let's revisit correlations between various indices. Three tables below summarise:

Core takeaways from the above tables:

• Consumer Confidence Index (CCI) has now moved into correlation range with Volume of sales that is similar to the one observed prior to the crisis: 0.757 vs 0.741 and this correlation is no longer negative. This confirms what I said above in the analysis of the first chart. And this is potentially good news, as it suggests firming up of the upward trend in the Volume of sales.
• Consumer Confidence Index remains weakly correlated with Value of Sales (0.393) as compared to pre-crisis (0.720), but it is now also positive as opposed to crisis period readings. This means, as I said above, that it is probably too early to call growth trend in Value series, but it is now time to watch the series closely for confirmation of denial of such trend.
• Much of the RSAI index performance is skewed by the CCI presence in the series computation. Still, the index tracks much better the Value and Volume activity in the Retail Sector than the CCI.

30/5/2014: IMF: We are Failing, but We Soldier On… at Your Expense...

IMF press release from today [my comments in italics]:

"The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Greece’s performance under an economic program supported by an Extended Fund Facility (EFF) arrangement. The completion of this review enables the disbursement of SDR 3.01 billion (about €3.41 billion, or US$4.64 billion), which would bring total disbursements under the arrangement to SDR 10.22 billion (about €11.58 billion, or US$15.75 billion).

In completing the review, the Executive Board approved a waiver of nonobservance of the performance criterion on domestic arrears, given the corrective actions taken. In light of the delays in program implementation, the Board also approved the authorities’ request for rephasing three disbursements evenly over the remaining reviews in 2014. [In other words, Greece failed to deliver on programme commitments on time. IMF response - just shift the goal posts. Behind the scenes, of course, we all know that Greece is routinely failing to deliver on the Programme and that delivering on said Programme is actually not exactly what Greece needs to restore its economy to growth and its society to health. IMF knows the same, but being a committed 'European' the Fund can't openly say the same in full voice. So instead of admitting the failure of the Programme, it pushes off targets and alters time frames.]

...Following the Executive Board discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“The Greek authorities have made significant progress in consolidating the fiscal position and rebalancing the economy. The primary fiscal position is in surplus ahead of schedule, and Greece has gone from having the weakest to the strongest cyclically-adjusted primary fiscal balance in the euro area in just four years. However, several challenges remain to be overcome before stabilization is deemed complete and Greece is back on a sustainable, balanced growth path. [We know what 'surplus' Greece delivered in 2013. http://trueeconomics.blogspot.ie/2014/04/2542014-stretch-of-numbers-here-bond.html IMF knows this too. Still, soldier on… nothing to admit here.]

“Additional fiscal adjustment is necessary to ensure debt sustainability, through durable, high-quality measures, while strengthening the social safety net. It is essential that the authorities continue to improve tax collection, combat evasion, and strengthen expenditure control. Public administration reforms need to be accelerated. The authorities are taking remedial actions to clear domestic arrears and expedite privatization. [Alas, even the IMF has to face the facts. The Fund does so in a Monty Pythonesque way by calling for more adjustments. After successful adjustments imagineered above, more adjustments still needed… It is as IMF is playing a role of doctor who, having sawed off one leg of the patient is now claiming operation success because the other leg has to go too…]

“Despite significant wage adjustment, export performance remains comparatively weak. The redoubling of efforts to liberalize product and service markets is therefore welcome. Further measures are necessary to remove regulatory barriers to competition in key sectors and to reform investment licensing. The authorities are committed to revitalizing labor market reforms and improving the business climate. [No one can accuse the Fund of ever once having exported anything, save research papers and policy proposals. Having no understanding of business, the IMF thinks that if/once Greece cuts prices/costs sufficiently enough and 'liberalises markets' the entire world will start glamouring for Greek-made exports. What markets does Greece need to liberalise to improve export performance? Exports require goods and services that someone in the world wants. Name sectors of Greek economy that can export that are currently not exporting.]

“Addressing the very high level of nonperforming loans remains an important priority. While there is no acute stability risk, it is critical for the economic recovery that banks be adequately capitalized upfront to recognize losses on the basis of realistic assumptions about loan recovery. Efforts are being made to recapitalize the banking system and set aside the buffer of the Hellenic Financial Stability Fund to deal with contingencies that may arise during the program. The private debt resolution framework should also be strengthened expeditiously. [Efforts to recapitalize Greek banks have been ongoing for a good part of 3.5 years now. Does IMF have any idea when these efforts might bear some fruit? Or is this too a fungible time line?]

“Public debt is projected to remain high well into the next decade, despite a targeted high primary surplus. The assurances of Greece’s European partners are welcome that they will consider further measures and assistance, if necessary, to reduce debt to substantially below 110 percent of GDP by 2022, conditional on Greece’s full implementation of the program,” Mr. Shinohara stated. [Key point is this: Greece needs debt restructuring that will have to be concentrated on public lenders. Aka: ECB and European 'partners'. We are in 2014 now - four years into witnessing staunch denial from the ECB and European partners of the need for such measures. Keep shifting the targets, IMF. It is about the only route to saving face in this mess left to the Fund.]

The entire Greek programme analysis by the IMF now firmly resembles a one-handed resignation that a second rate tennis player starts to display at the end of the second set, having lost the first one and going on to 6:0 loss for the second round.

30/5/2014: That State-Sanctioned Inflation Tax...

There is much to be analysed in the Irish Retail Sales figures for January-April 2014, updated by the CSO this week. And I intend to do so on this pages at a later time.

But one thing jumps out: taking data for Q2 2014 to-date (in other words, looking at April performance), and comparing this against all previous Q2 data (monthly averages for April-June) gives a bit of a shocker:

Per chart above, since the onset of the crisis (from the peak) through today, both values of retail sales and volumes of retail sales have declined. With exception of food, these declines have been pretty sharp and despite some improvements in recent months, they remain sharp.

But, in all cases, across all broad categories of goods traded, retail sales have fallen more by value than by volume. This means that retailers have been selling less in terms of actual volumes of goods, but are receiving even less in terms of revenues for these goods sold. Of course this means two things:

1. There is on-going deflation in those sectors where value declines are steeper than volume declines; and more importantly
2. There are lower margins (and lower investment and hiring) in the segments where (1) takes place.

Yet, two segments of goods stand out from this picture: Bars and Automotive Fuel. In both, value of sales declined less than volume. In other words, less is being charged for these goods, but even less is being supplied. That is a signifier of rising cost of provision of same goods at retail level - or in plain terms - real, actual inflation. Now, both sub-categories are witnessing two sub-trends:

1. Inputs costs in both are not rising at any appreciable rate (fuel inflation relating to oil prices is relatively low over time considered, and drink industry is seeing lower factory gate prices, not higher);
2. Taxes on both are rising, at various stages of supply chain.

In other words, the chart above shows that in Irish economy, the inflation tax is being forced through heavily taxed sectors where the State extracts the lion's share of final cost of goods supplied to consumers.

The above also puts under serious questions the bars industry lobby claims that there is a need for high level minimum pricing on alcohol. Their sector, it appears, has been hit by a drop in demand and not by a drop in prices. In fact, if anything, ceteris paribus, their sector might benefit from lower prices - charging punters 7 quid per pint of domestic beer is not a good way to improve your sales, you know...

29/5/2014: Earnings in Ireland: Something's Fishy in that Murky Water?..

Average weekly hours and earnings were released by CSO this week, covering Q1 2014 data. Remember, these are delivered in the context of reportedly growing employment and accelerating economic activity, right?

Ok, top-line observations: y/y average weekly earnings are down 0.4% or EUR2.66/week (EUR138.32 per annum, assuming paid holidays and not adjusting for working hours etc, but you get the point: in 2013 a person earning average weekly earnings level of salary would have had EUR2,346 per month in disposable after-tax income, in 2014 they have EUR2,341 per month).

Worse than that, the decline in weekly earnings was driven by a drop in average hourly earnings (down 0.5% y/y) against flat hours worked (31.2 hours/week on average). In other words, we are creating jobs in tens of thousands, but seemingly there is no pressure on hours worked and there is downward pressure on hourly earnings.

Were these changes down to cuts in bonuses, perhaps?

Well, no: excluding irregular earnings, average hourly earnings fell 0.6% y/y. So if you work in a job where bonuses are not present, congratulations, the economic recovery is biting into your earnings even more. It is worth noting that this trend is not uniform in the economy: private sector hourly earnings rose 0.6% but public sector earnings fell 2.5% year on year. And steepest increases in earnings took place in enterprises with less than 50 employees (+2.3% y/y), while steepest declines took place in enterprises with 50-250 employees (-2.9% y/y). Large enterprises saw average hourly earnings excluding irregular earnings fall 1.6%.

So short term falls in earnings are down to public sector and larger enterprises...

Of course, earnings can be volatile even y/y, so here is a handy comparative for earnings changes on Q1 2010:

Per CSO: "Across the economic sectors average weekly earnings increased in 7 of the 13 sectors in the year to Q1 2014, with the largest percentage increase in the Construction sector (+10.2%) from €639.35 to €704.41.  The largest percentage sectoral decrease in weekly earnings was recorded in the Education sector (-2.7%) from €814.12 to €792.03. Between Q1 2010 and Q1 2014 average weekly earnings across individual sectors show changes ranging between -6.3% for the Education sector from €845.59 to €792.03 and +13.6% for the Information and communication sector from €915.94 to €1,040.10"

Still, Public Admin & Defence are down just 0.1% on Q1 2010... shrinking Industry is doing swimmingly, as does Finance & Insurance & Real Estate...

On last bit: average working hours were unchanged y/y in private sector, but up 2.3% in public sector. Which is worrisome - rising employment in private sector should lift hours ahead of numbers employed, by all possible logic, since hiring more workers is costlier than letting those employed work longer hours for the same or even higher pay. Still, hours are static y/y, and are up by only 0.1 hour on Q1 2010... Puzzling... Worse: working hours are unchanged y/y and down on Q1 2010 for smaller firms, where wages pressures seem to be highest.

This simply does not gel well with the numbers of tens of thousands of new employees, unless, of course, new employees are working fewer and fewer hours...

24/5/2014: UofL Student Wins Worldwide Alltech Young Scientist Competition

Some excellent news from the Irish knowledge 'economy' (society, really) front:

Gillian Johnson, from the University of Limerick, was the winner of the undergraduate competition run by Alltech Young Scientist Program. Johnson’s research work focused on comparative genomic identification and characterisation of a novel β-defensin gene cluster in the equine genome.

Gillian won in the field of more than 8,500 participants, representing the future generation of animal, human and plant health scientists from around the world.

In the graduate category, winner was Lei Wang, originally from China and currently completing her PhD studies in the United States with the University of West Virginia. Wang’s research work focused on novel functional roles of oocyte-specific nuclear transporter (Kpna7) in relation to developmental competency of rainbow trout oocyte and early embryo.


To participate in the program, students wrote a scientific paper that focused on an aspect of animal health and feed technology. The first phase of the program included a competition within each competing country, followed by a zone competition. The winners of each zone moved on to a regional phase and the regional winners competed in the global phase.

The Alltech Young Scientist Program is currently taking applicants for its 2015 competition. To enter, visit www.alltechyoungscientist.com.

22/5/2014: Labor Mobility within Currency Unions & some Implications for Ireland

A very interesting theoretical paper "Labor Mobility within Currency Unions " by Emmanuel Farhi and Iván Werning, April 2014 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2436714) looks at "the effects of labor mobility within a currency union suffering from nominal rigidities."

The departing point for the paper is Mundell (1961) famous dictum that labor mobility must be a precondition for optimal currency areas. In support of this dictum, the U.S. "enjoys relatively high mobility and has proven to be a successful currency union. Mobility is arguably much lower within the Eurozone, which sunk into trouble scarcely ten years after its inauguration." Of course, despite the shallower extent of mobility in Europe, EU policymakers repeatedly cite free mobility regime for labour within the EU as a major cornerstone of the EU and, thus, by corollary - to the functioning or the promise of functioning of the euro zone.

Despite all the intuition behind Mundell's proposition, there is little formal research connecting mobility with macroeconomic adjustments in a currency union setting.

Farhi and Werning "set up a currency union model featuring nominal rigidities and incorporate labor mobility across the different regions (or countries) that compose the currency union." The paper tackles "…two related questions. First, does mobility help stabilize macroeconomic conditions across regions in a union? Second, is equilibrium mobility socially optimal?"

The study does not quite confirm Mundell's proposition, but its findings "…are consistent with a potential important role for mobility. Workers migrating away from depressed regions naturally benefit from the option to pick up and go somewhere better. The interesting and less obvious question is whether their exodus also helps those that stay behind. That is, whether it aids in the macroeconomic adjustment of regions. A major insight of our analysis is that the answer to this question is subtle because workers leaving a region depart not only with their labor, but also with their purchasing power."

This leads to a divergent set of outcomes depending on the source of the original shock to the economy. If the demand shock comes from internal (region-specific) shock (like, for example, in the case of Ireland where property crash led to massive disruptions in domestic demand and where domestic demand continued to shrink every year since 2008, uninterrupted), the authors find that "…migration may not help regional macroeconomic adjustment." How so? "…we provide a benchmark case where migration has no effect on the per-capita allocations across regions. For this benchmark, the entire demand shortfall in depressed regions is internal, located within the non-tradable sector [again, think Irish construction, property and retail sectors, and associated banking sector bust]. When workers migrate out of a depressed region local labor supply is reduced, but so is the demand non-traded goods, which, in turn, lowers the demand for labor. The two effects cancel, leaving the situation for stayers unchanged."

In contrast, "…when external demand is also at the root of the problem, migration out of depressed regions may produce a positive spillover for stayers." This, of course, applies to economies like Portugal and Cyprus, where external shocks are the main drivers for the crisis. When depressed regions also suffer from external demand shortfalls, "…migration out of depressed regions may help improve the region’s macroeconomic outcome. For example, at the opposite end of the spectrum, suppose regions only produce traded goods and that there is no home bias in the demand for these goods. The demand for each region’s product is then determined entirely by external demand at the union level, and internal demand plays no special role. In this case, migration out of a depressed region improves the outcome of stayers by increasing their employment, income and consumption."

On a positive side, from Ireland's point of view: "…the degree of economic openness (how much regions trade with one another) turns out to be a key parameter. Openness was proposed by McKinnon (1963) as another precondition for an optimal currency area." Except, of course, as we in Ireland are fully aware, openness can be real (e.g. Swiss exporting indigenous output that is matched by the MNCs exporting out of Switzerland) and accounting (e.g. Irish exports of ICT services or phrama).


Lastly, it is worth noting that the paper does not consider rigidities beyond those present in the pricing mechanisms. Thus, for example, labour laws are not included and neither are hiring practices or promotional practices that can severely skew flows of labour.

23/5/2014: Another 'Big Deal' of the Russian Week

Thought the Russian gas deal with China was a 'biggy'... at USD400-440 billion valuation (over 30 years) it is. And here are some of the details: http://trueeconomics.blogspot.ie/2014/05/2152014-russia-china-gas-deal.html

Welcome to the big numbers week for Russia. Today, Lukoil and Total announced a new deal for developing Bazhnov Shale Oil Field: http://www.lukoil.ru/press_6_5div__id_21_1id_24775_.html

The field (dating to Jurassic deposits) was discovered 45 years ago back in 1968 by an accident, the field is currently being developed by a number of companies, including a partnership between Rosneft and ExxonMobil, and Salym Petroleum - a JV between Shell and Gazprom Neft.

So far, reported recoverable reserves are officially booked at 3.5 billion barrels (500 million metric tonnes). Official estimates are for daily yields of 1-2 million barrels per day by the end of this decade. For comparative, US North Dakota aims to reach production levels of 1.2 million barrels per day by 2015 - this is the largest US shale oil play at this time. Its biggest field - Bakken - is small comapred to Bazhenov (see here one older report: http://www.forbes.com/sites/christopherhelman/2012/06/04/bakken-bazhenov-shale-oil/ and an FT report on same: http://www.ft.com/intl/cms/s/0/17e0e3d0-25c6-11e3-aee8-00144feab7de.html#axzz32YDYxj72).

Overall estimates put Bazhenov reserves at between 20 billion barrels and 950 billion -1 trillion barrels, which runs into recoverable equivalents of up to 160-170 billion barrels. Merill Lynch 2013 assessment estimated reserves at 75 billion barrels (recoverable , EIU estimates from 2013 show Bazhenov recoverable reserves at between 3.7 and 14.8 billion barrels of light crude. At mid-point (excluding outlandishly large 160bn estimate), this implies some 40 billion barrels worth around USD3.3 trillion at past decade averages. Which puts into perspective that USD440 billion gas deal.

At the upper end of this estimate, Bazhnov field pushes to 4 times Saudi Arabia's oil reserves or roughly 30 years of world supply at current demand levels. This is why IEA considers Bazhenov field as the world's largest source of shale. Of course, Russia is already producing more oil than Saudi Arabia with daily production of 10.3 million barrels per day and Russian most productive fields - those of West Siberia, like Salym group, are declining, with production dropping at an average of 2% annually.

Here's the map of Russia's main oil producing regions:

Bazhenov covers roughly 1/3rd of the West Siberian basin (http://en.wikipedia.org/wiki/File:USGS_-_Bazhenov_Formation_Oil_Reservoir.png)

But back to the Russia-China gas deal... there is huge legacy infrastructure network linking Europe with Western Siberian basin, and virtually no networks linking it to the Asia-Pacific. With the gas agreement signed this week, this is about to start changing. Which means that the gas deal will promise to wire shale oil and gas reserves of the entire Siberia into the massive AP markets, providing two key deliverables for Russia:

1. Diversification of demand, linking more closely pricing in the Western European markets (stagnant of economic growth and demographic expansion) to that of dynamic AP. Russia wins in this scenario big time, as it will no longer be held hostage to the declining macroeconomic fortunes of the EU.
2. Head-on competition with North America (where LNG and oil shipments will have to go via sea transport as opposed to pipe in Russian case).

Europe also wins, as the second point above will help contain energy price inflation in the EU as North Sea production declines in decades ahead.

The point that is being missed on the Russia-China deal by many analysts is that, politics aside, Russia will benefit from a massive shifting of economic activity East - to the regions rich in resources and starving of infrastructure to develop them. With this shift, Russian social development also will gain - the sparsely populated expanses of Eastern Siberia can do with the population growth that can happen on foot of large and sustained capex uplift. 

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...

So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:  http://www.bloomberg.com/news/print/2014-05-01/irish-central-bank-said-to-mull-faster-2014-bank-aid-bond-sales.html

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:

Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.

More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor http://www.ntma.ie/news/ntma-issues-eight-new-floating-rate-treasury-bonds-in-exchange-for-promissory-notes/ reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

22/5/2014: Irish Domestic Energy Prices

As you all know, I have been covering the state of affairs when it comes to the state-sanctioned inflation here in Ireland for some time - including in the pages of my now defunct column at the Sunday Times.

Here is the article from the Irish Independent on energy price inflation in Ireland, comparative to the EU: http://www.independent.ie/irish-news/electricity-prices-fourth-highest-in-eu-after-5pc-rise-30294653.html

And the original EU data: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/8-21052014-AP/EN/8-21052014-AP-EN.PDF

Still believe in the benevolence of the State? Or that Irish Government should be running gas & oil resources of this country? Really?