Russia invaded the Crimean peninsula in the country of Ukraine in the beginning of March. President Vladimir Putin sent 6,000 troops into the area to protect Russia's port access to the Black Sea. Although Putin said he has no intention of annexing Crimea, his troops blockaded all military bases on March 6. He called for a local referendum for March 16 to determine whether Crimea wants to become part of Russia.
President Obama said the referendum violates international law, and won't be respected. He announced that assets have been frozen and U.S. visas blocked for everyone who has "impeded democracy, contributed to violence or engaged in corruption in Ukraine." In addition, the U.S. Department of Energy is considering whether to lift bans on exports of natural gas to Europe. The U.S. will allow exports if Putin shuts off Russia's supplies to Europe and Ukraine. Congress is putting together $1 billion in loan guarantees, further sanctions, and support for loans from the International Monetary Fund.(Source: CNN)
Putin is unlikely to withdraw troops from Crimea, as it holds Russia's only warm-water port. In addition, Crimea contains natural gas reserves, which Ukraine planned to develop in two years in a partnership with U.S. companies. If Ukraine does this, Russia loses one of its largest customers. Putin's goal is to slowly absorb Crimea, keeping the rest of Ukraine in turmoil. (Source: Fox Business News, Interview with former Georgia President Saakashvili, March 4, 2014)
Putin said he took this action now to protect ethnic Russians in Crimea from an anti-Russian sentiment in Ukraine. However, those Russians were moved there by Joseph Stalin 50 years ago to strengthen the Soviet Republic's hold on the area. Russia annexation worries 260,000 Muslim Tatars in Crimea, who were subjected to ethnic cleansing during the Soviets rule. They were forced to move to Central Asia, where half of them died. Crimean Tatars peacefully supported Ukraine's Orange Revolution. ( Source: WSJ, Crimea's Tatars Try to Keep Their Resistance Peaceful, March 11, 2013)
Putin is responding to the February 23 overthrow of Viktor Yanukovych, who was an ally. The pro-West faction of Ukraine's Parliament took over the government, setting up new elections for May 25, and installing Oleksandr Turchynov as the country's temporary leader.
The crisis occurred because Yanukovych mismanaged the budget, forcing Ukraine to ask for financial help. First, it appealed to the EU, then Russia. The political unrest occurred at this point, because those who want to be closer to the EU objected when that solution was abandoned. Russia's military strike support Yanukovych's return to Kiev and closer ties to Russia.
President Putin rejected a U.S. proposal to join a tri-partitie discussion between Russia, Ukraine and the EU. If Putin doesn't remove troops, Obama wants to impose the same economic sanctions that weakened Iran. Germany is not too keen on sanctions, since Europe imports much of its natural gas and oil from Russia. Secretary Kerry also mentioned ousting Russia from the Group of Eight.
Russia is one of the emerging markets that suffered a currency meltdown earlier this year. Forex traders abandoned these markets when the Federal Reserve began tapering its Quantitative Easing program, reducing credit around the world.
Russia waged wars in the past in Chechnya in the early 2000s. He annexed Ossetia in Georgia in 2008, and the Western world didn't really intervene. He also successfully launched a cyber-attack on Estonia. However, Ukraine is larger and borders the EU directly. (CNN, Interview with Chairman of House Intelligence Committee Mike Rogers (R-Mich.)
3 Ways It Affects You
- Gas prices rise -- Oil prices initially rose $2 a barrel, but eased later last week. Further volatility will drive up gas prices over the next few weeks. Commodities traders are using this uncertainty as an excuse to boost oil prices, which they do every year at this time. Prices usually drop by April.
- Stock prices drop --The invasion triggered an across-the-board sell-off on Wall Street, sending the Dow down 158 points. Stock prices recovered on Tuesday and hit new highs on Thursday. Bond prices rose, which lowered the yield on the 10-year Treasury note to 2.6%. However, the crisis isn't over yet. Until it is, expect potential further downturns.
- Import prices drop -- Investors fled to safe-haven assets likes gold (up $28), the U.S. dollar and Treasuries. Surprisingly, the euro is also becoming a safe-haven investment. As the dollar strengthens, it makes the prices of many imports higher. This may also slow economic growth for this quarter, as a stronger dollar makes it more expensive for U.S. exporters.
Six weeks ago, China's currency (the yuan) hit an 18-year high of 16.5 cents. Since then, it's declined 1.36%, to 16.3 cents. So why should you care about such a small change in a currency half-way around the world? It's not the change itself that's an alarm bell, it's the reasons behind the change. First, after 30 years of double-digit growth, the Chinese economy has slowed more than its leaders would like. Growth was an acceptable 9.3% in 2011, 7.8% in 2012, but just 7.6% in 2013. (Source: WSJ, China Weakens Yuan by Largest Degree Since 2012, March 10, 2014)
Second, the recent decline is a reversal of a trend that's been ongoing since 2005. That's when China agreed to allow the yuan to strengthen against the dollar. A weak yuan is what's allowed Walmart to sell product "Made in China" so cheaply. However, American manufacturers complained, and the U.S. government pressured China to allow the yuan to rise, which it's done for the last nine years. This recent reversal means China's leaders are seeking to boost exports by pricing the currency weaker again.
It also means that China is letting the world know what happens when it allows a more free-market economy. China is mostly a command economy. However, its leaders recognize that innovative small business need less control. China wants to make things easier for them to innovate so they can be more profitable and create better jobs. This allows the country to be less dependent on manufacturing and low-cost exports.
The most important changes are to the state-owned companies, which control energy, banking and utilities. The government is relaxing price controls, allowing them to become more competitive. In return, they must pay higher dividends to the government to finance more public services. This will create a social safety net, allowing Chinese people to save less and spend more.
It also creates the possibility of bankruptcy, something China's leaders have not allowed. As a result, there's lot of state-owned companies that are carrying lots of bad loans and unprofitable businesses. China has allowed the first default, of a solar company, to prove it is becoming more market-oriented. (Source: CNBC, China Allows First Corporate Bond Default, March 7, 2014)
The concern is that China's new leaders can't manage all these changes at once. If they take too long, the economy could slump even further. The state and local government officials may try to block the changes. If they overshoot, that could also throw the country into recession. Even if they are successful, change of this magnitude is risky. Other countries, like Norway, Argentina and Thailand, have liberalized their financial sectors only to suffer banking crises within a few years.
How It Affects You
If China experiences a recession, it will directly affect the U.S. by creating more volatility in the world's financial markets. This would offset any U.S. demand for Chinese exports, which normally has kept China out of a recession. For more, see U.S. China Trade Deficit.
Remember a little country called Greece, which was supposedly too small to hurt the world's economy? A recession in the world's third largest economy would have worse negative consequences. Even a close call could destroy confidence in global trade and growth, dragging the world into recession. Read More...
A welcome 175,000 jobs were created in February. However, this is despite the loss of -16,000 jobs in information technology. This sector is a major driver of American competitiveness. For more, see Silicon Valley.
This was much better than the 113,000 jobs created in January, and the 75,000 jobs created in December. However, it's a little disappointing after the 274,000 jobs added in November and the 237,000 jobs in October. Slightly more jobs were added than the 150,000 minimum needed for healthy economic growth.
The strength was due to small gains in nearly every sector. Hotels and restaurants added 25,000 jobs, health care gained 14,700 jobs, and wholesale trade grew by 14,800 jobs. Manufacturing added just 6,000 jobs. Construction only added 15,000 jobs, after adding a whopping 50,000 in January. .
Surprisingly, government added 13,000 jobs, after losing 16,000 in January and 2,000 in December. These numbers were also revised up, no doubt taking into account the positive impact from the end of sequestration.
These gains more than offset several sectors that lost jobs. Retail lost an additional 4,100 jobs, as sales continued to disappoint, and this impacted transportation (-3,600).
Temporary help jobs increased by 24,400. This usually indicates that businesses are unsure about the future strength of the economy, and are hesitant to add full-time positions.
The unemployment rate remained at 6.7%, but January's rate was revised down to 6.6%. Basically, not much is changing on the unemployment front, as the labor force participation rate remained at 63%. (Source: BLS, Employment Situation Summary, March 7, 2014)
How It Affects You
The stock market was mixed after this report. Many investors think that economic data won't be clear until after the winter storms subside. However, economic growth was sluggish starting with Halloween retail sales. Expect the market correction to resume in April or May, as investors realize slow growth was not just due to the weather.
Also, many investors think the Fed will beef up its Quantitative Easing purchases if the economy falters. Even though new Fed Chair Janet Yellen is more concerned about unemployment than inflation, the Fed knows it must withdraw liquidity while times are relatively good if it's to have any dry powder ready for another recession.
The government revised its estimate of Gross Domestic Product for the fourth quarter (October-December) of 2013. The economy only grew 2.4%, down substantially from last month's first estimate of 3.2% growth. What caused the Bureau of Economic Analysis to become more pessimistic? Personal consumption grew just 2.6%, instead of the first estimate of 3.3%.
This is in keeping with the disappointing retail sales. Most of the decrease was from revised estimates for automobiles, washing machines and other big-ticket items financed by low-interest rate loans. Spending on these durable goods only rose 2.5%, instead of the initial estimate of 5.9% in growth.
Another huge drag on growth was housing construction, which was down a whopping 8.7%. If you think that's just because of cold weather, construction grew 19.8% during the same time period in 2012.
How It Affects You
The economy is growing at a healthy rate, but it's slow. Consumer spending hasn't picked up as you would expect at this phase of the business cycle. That's because people aren't really feeling prosperous. Many are working at jobs that pay less than the ones they lost during the recession. Although home prices have improved, many have lost their homes and can't afford a new one soon. Those who kept their homes know the value hasn't recovered to 2006 levels.
For years, economists warned that the Americans were took on too much debt, and didn't save enough. Now we are correcting our own financial houses, and that's a good thing. However, don't expect economic growth to coming roaring back. We may continue like this for another year or so. For more, see U.S. GDP Outlook.
A reader writes:
I'm a coop student working at a petrochemical company in Saudi Arabia. I've read some of your articles about oil prices. I'd like to ask you a question: If the price of gasoline is fixed from the government, this will affect any company that relies on oil products since the crude oil price is fluctuating. I'd like to hear your thought about this situation and if you have any suggested solution to it.
The demand for gasoline is fairly inelastic, which means it doesn't change a lot based on price changes. That's because the amount of gas people used is based on their commute to their job, their need for supplies, and the type of car they drive. These factors can't be changed quickly, even if prices rise dramatically.
Meanwhile, as you said, the price of oil will fluctuate, based on the actions of commodities traders. They usually bid up the price of oil each spring. They know demand for gasoline will increase as families take to the road for summer vacations. They also bid up oil prices if there is a potential interruption of oil from the Middle East or Africa due to political turmoil.
Oil prices normally make up 71% of the price of gas. If oil prices rise, and gas prices don't, at some point it's not worthwhile for refineries to buy the oil and create gasoline. This will create a shortage, which will obviously drive down demand. That will eventually drive down the price of oil. Of course, it would create great hardship, as the U.S. experienced in the 1970s with long gas lines.
What if oil prices dropped? Then refineries would reap large profits. They would buy more oil contracts at the lower price, hoping to maintain this improved margin. The lower price wouldn't last long, as increased demand for oil contracts would boost oil prices.
- How Oil Prices Affect Gas Prices
- How Does Commodities Trading Affect the U.S. Economy?
- What Makes Oil Prices So High?
Photo: Marilyn Conway/Getty Images
Orders for aircraft, machinery and other long-lasting equipment dropped 1% in January, to $225 billion, after falling 5.3% in December. As usual, the loss was mostly driven by transportation, which was down 5.6%. When transportation was excluded, new orders rose 1.1%.
Most of this is commercial aircraft. Boeing has a huge backlog of orders, enough to drive its production levels for the next seven years. (Source: Forbes, Boeing's Huge Backlog, February 26, 2014)
Orders for capital goods dropped a sickening 3.9%. That's business orders for computers and electronic equipment, machinery and fabricated metal products. It means companies aren't confident enough in future economic growth to invest in expensive, long-lasting equipment. This confirms the lack of confidence in the January jobs report.
Shipments of durable goods orders placed earlier this year fell .4%. Shipments are measured as part of the nation's economic growth. This means the first quarter Gross Domestic Product (GDP) report will probably be disappointing. (Source: Commerce Department, Advance Report on Durable Goods, February 27, 2014)
How It Affects You
The durable goods report is the most important leading economic indicator. That's because businesses and consumers think twice before buying these big-ticket items. The decline in shipments and orders means economic growth will be around 2-3% for the first quarter. That will probably aggravate the stock market correction. The market pretty much ignored the poor durable goods report, but it shouldn't
A reader asks:
I'm curious how FDR's new deal brought an end or could have brought an end to the Great Depression. The NIRA disallowed the economy to approach wage equilibrium, The Ag Adjustment Act inflated pricing and kept people hungry, Davis Bacon and Morris LaGuardia Acts strengthened unions during a time when production needed to be scaled back as the Aggregate Demand curve shifted to the left. The Fed's monetary policy can be the fall guy but didn't FDR's constant meddling (public activity) help his political career but not the economy?
Answer: The sheer amount of government funds that was pumped into the economy to fight World War II ended the Great Depression. On November 7, 1941, Japan bombed Pearl Harbor and the U.S. officially entered the war. The U.S. debt increased from $6 billion (that's right, billion not trillion!) at the end of that year to a whopping $23 billion by the end of 1942. By December 1943, it had tripled to $64 billion. In total, government spending on WWII increased the debt by $58 billion.
How much did the debt increase because of the New Deal? Just $3 billion. The U.S. debt went from $3 to $6 billion between 1932 and 1941. If FDR had spent $58 billion on the New Deal, it would have ended the Depression. The sheer amount of money being pumped into the economy would have jumpstarted it into life.
Why? First, government spending is a component of GDP, or Gross Domestic Product. This measures the total output of the U.S. economy. In 1933, GDP was only $57.2 billion. If FDR had spent $58 billion, instead of $3 billion, on the New Deal, it would have doubled GDP, and ended the Great Depression.
Second, that massive amount of government spending would have boosted confidence in the future. That's what FDR was talking about when he said, "The only thing we have to fear is fear itself." Lack of confidence creates a downward economic spiral, as people stop spending, businesses lay off workers, and unemployment rises. Government spending will boost that confidence, and create an upward spiral as people start shopping again, businesses hire new workers, and the jobless rate declines.
I am wondering your take on the national debt. Without cutting spending dramatically or increasing tax revenue dramatically (easier done with high employment and high productivity -- not part time jobs). . .how is possible to ever pay off the debt? It appears that we are borrowing more and more to spend more. If interest rates go up. . .that will add to the deficit. Is it possible that there is no intention to ever pay it off?
Sovereign debt (owed by countries) is only a threat when creditors become worried it won't get paid back. They use several tools to determine this. The most important is the debt-to-GDP ratio. That compares the level of debt to the entire economic output of the country, which is measured by Gross Domestic Product.
What is that tipping point when creditors start to worry? It's generally when the debt-to-GDP ration exceeds 77%, according to the World Bank. However, keep in mind that creditors are only worried about the public debt.
The U.S. debt is $17.4 trillion, but only $12.4 trillion was public debt. The rest is owed to itself, mostly the Social Security Trust Fund. It does need to pay this one day, as Baby Boomers retire, but creditors aren't worried about this component of the debt.
GDP was $17.1 trillion at the end of 2013. The public debt-to-GDP ratio of the U.S. is only 73%, not yet at the tipping point.
Will the government ever pay it off? Not likely, for three reasons:
- Elected officials get voted out of office if they cut popular programs, like Medicare, defense, and Social Security.
- Over time, the economy has grown robustly enough to dwarf the debt. The U.S. debt at the end of World War II was $259 billion. That was a lot then, but not much now. Politicians are banking that today's debt will be dwarfed by tomorrow's economic growth.
- The only way to reduce the debt is, as you said, cut spending or raise taxes. Both are highly unpopular, which is why most people only want to do it to others.
Therefore, the only way the U.S. will reduce its debt is if the American people are ready to tighten their belts and accept austerity. The most painless time to do so is when the economy is booming, with GDP growth rates above 3% and unemployment at 5% or less. In fact, that's the BEST time to cut the debt, because it will slow economic growth and actually prevent a recession. For more, see Business Cycle Stages.
What will it take to get the economy moving again and create more jobs? It's simple, really -- the rich should invest less and buy more. In 2013, growth was an anemic 1.9%, while the stock market surged 26.5%.
The recession benefited the rich the most. In 2012, the top 10% of earners took home half of all the income in the U.S. But they aren't plowing that back into consumer goods, which is 70% of the economy. They are wasting it on investments that don't create the most jobs.
The rich need to do their patriotic duty, and buy more stuff made in the U.S.A. This would help small businesses, which create 65% of all new jobs.
The rich who already have too much stuff could build more roads, bridges and other infrastructure. They could put their names on them! Public works creates the most jobs per dollar spent -- 19,795 jobs per billion dollars spent, according to a UMass/Amherst study about unemployment solutions.
To provide more incentive, let's use the tax code to reward shopping. Right now, investment income is only taxed at 15%. Raise it to the same level as income taxes. All income should be taxed the same, regardless of where it comes from. Why should good, honest work be taxed higher than investments? Spread this increased Federal income to the states, so they can do away with the sales tax.
I mentioned this idea in last week's newsletter. Here's what some readers said:
"Back to the Ancient Past. I'll have to get a Patron. Seriously, 70% capital gains tax sounds reasonable since these asset holders are the main recipients of QE. Why shouldn't they have to give back? The problem with ancient Greece is that only the Patrons invested in infrastructure and charity, and when they went on strike Rome fell." Eli
"I think your idea for boosting retail sales is great: the rich should play less with their money and consume more American products and services. Ditto on financing credited roads, bridges and infrastructure. Wonderful!" Michael
"I agree with your idea about the very wealthy spending more. A problem we see here in Hawaii is that the ultra-rich donate to some charity, a huge amount that is then earmarked for a particular group enriching few. I also saw where Zuckerberg donated nearly a billion dollars to a charity which I don't think creates many jobs at all. In 'the good old days,' the Rockefeller's, Astor's, etc. funded large building projects like libraries, theaters, and the highways you mentioned. I believe trickle down is a good solid concept for a democracy but it should create jobs, not just enrich singular charities. Although I disagree with you often, I do enjoy your writing and appreciate your research." aloha, Robert
This idea should also be attractive to conservatives, because it gets the government out of building infrastructure. As President Reagan said, ""Government is not the solution to our problem, government is the problem." Liberals will like it, because it raises taxes on the rich without increasing the income tax rate.
The onslaught of brutal winter storms that pummeled the nation drove home heating oil prices up 3.7% in January, according to the latest Consumer Price Index report. Natural gas prices rose 3.6%, nearly as much. These fuel costs were offset by price drops elsewhere: gasoline (-1%), new cars and trucks (-.3%), and apparel (-.3%). As a result, inflation was mild, rising only a miniscule .1%.
These fuel oil and natural gas prices will drop in the spring, as will any price jumps in gasoline. That happens every year, as refineries finish their maintenance and reopen for the summer driving season. Therefore, expect inflation to remain even less of a threat.
The Federal Reserve looks at a different inflation measurement, one that strips away monthly changes in gas and food prices. That's the so-called core inflation rate. The Fed prefers to compare prices to last year, to take out any seasonal impact as well. That rate was just 1.6%, well below the Fed's 2% target. Â (Source: Bureau of Labor Statistics, Consumer Price Index, February 19, 2014)
How It Affects You
Inflation isn't a threat in the standard measurements. However, it's showing up in stock and bond prices, and other investments. That's known as an asset bubble, and it occurs when there's too much money chasing too few investments. The CPI only measures the prices of consumer goods and services, not assets like stocks, bonds and housing.
That's why the stock market went up 30% last year, and has been so volatile this year. What should you do? If invested in the stock market, keep an eye on prices. They could drop another 5% as the Fed removes Quantitative Easing this year.