Bernard's Top 10: Will ageing populations rekindle wage inflation and solve inequality?; China's massive money supply growth and the potential for capital flight to global property; Clarke and Dawe

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz. 

See all previous Top 10s here.

My must read is #1 on a big new idea about work, wages and inflation. Not sure I believe it, but it's a a thought provoker.

1. Are wages about to surge? - That's the question being asked in an explosive paper by former Bank of England official Charles Goodhart and fellow Morgan Stanley economists Manoj Pradhan and Pratyancha Pardeshi.

They argue that ageing populations in both the developed and developing worlds will create labour shortages that boost wage inflation and reverse the decades-long fall in the share of income going to workers. The chart below showing sharply rising dependency ratios in developed markets tells the story, although I note the global figure isn't rising much.

Ambrose Evans Pritchard looks at the implications here at The Telegraph. Naturally, he looks at what this would do for bond and other asset values.

Incoming....

"We are at a sharp inflexion point," says Charles Goodhart, a professor at the London School of Economics and a former top official at the Bank of England.

As cheap labour dries up and savings fall, real interest rates will climb from sub-zero levels back to their historic norm of 2.75pc to 3pc, or even higher.

The implications are ominous for long-term US Treasuries, Gilts or Bunds. The whole structure of the global bond market is based on false anthropology.

2. China would be hit hard - Ambrose points in particular at the issues with a falling working-age population in China, which we should care about.

China will face a double hit, thanks to the legacy effects of the one-child policy. "They kept it going 15 years too long, disastrously," said Prof Goodhart. China's workforce is already shrinking by 3m a year.

It is widely assumed that the demographic crunch will pull the world deeper into deflation, chiefly because that is what has happened to Japan - probably for unique reasons - since it pioneered mass dotage 20 years ago.

The Goodhart paper makes the opposite case. Healthcare and ageing costs will drive fiscal expansion, while scarce labour will set off a bidding war for workers, all spiced by a state of latent social warfare between the generations. "We are going back to an inflationary world," he said.

China will no longer flood the world with excess savings. The elderly will have to draw down on their reserves. Companies will have to invest again in labour-saving technology, putting their great stash of idle money to work.

3. Really? - This reversal in a decades-long trend would be quite something, but what about the countervailing forces of new technology replacing people. And also the potential for higher workforce participation. We've certainly seen that here in New Zealand.

The Economists' Buttonwood also looked at the Goodhart et al paper and challenges it:

The labour force could be boosted by greater participation by women and the elderly, or by immigration—although Mr Goodhart does not think these factors will be sufficient to compensate for the effect of ageing. The less educated, for example, find it harder to stay in the workforce beyond 65.

This last point also raises the question of whether inequality will fall as he predicts.

Demography has not been the only factor behind widening inequality: many economists point to “skill-biased” technological change as a driving force. Low-skilled workers who can be replaced by computers or robots will be more vulnerable in a world of rising real wages; the computer-literate will still command premium salaries.

4. And what about the 'just in time' freelance economy? - Paul Mason also wonders via The Guardian whether this supposed labour shortage will also lead to a rebound in wages, given the new technologies and flexible labour markets have changed the mindsets of workers and employers.

Their prediction has been celebrated by the Davos crowd and should, if it turns out to be correct, be welcomed by people who desire greater equality and social justice. But to make it happen, we need a total mindset change, not just among politicians and businesspeople, but among workers and consumers themselves.

The assertion that job security kills innovation is etched deep into the free-market mindset. The pursuit of flexible labour markets has, for the past 30 years, made it easy for bosses to hire and fire; and harder for workers to demand both higher wages and the higher security that comes with them. The zero-hours contract has become the symbol of this culture, but there is worse. Unions trying to organise precarious workers report many businesses where there is no contract at all. Temporary work, part-time work, contracts that guarantee just four hours work a week are all common in the low-pay sector.

The result is the precariat. A broad layer numbering in some countries 25% of the workforce, whose contracts are either temporary or informal, or who arrive via employment agencies.

5. Governance is everthing - The VW diesel emissions scandal is quite some story, but it begs the question: how on earth did this happen?

The New York Times has a good look at VW's strange governance system, which is dominated by worker representatives, local politicians and a couple of families, for the answer. It reports this was a disaster waiting to happen. A kindergarten teacher was involved...

Volkswagen’s recent history — a decades-long feud within the controllingPorsche family, a convoluted takeover battle and a boardroom coup — has dominated the German financial pages and tabloids alike. This week, the German newspaper Süddeutsche Zeitung compared Volkswagen’s governance to that of North Korea, adding that its “autocratic leadership style has long been out of date.” It said “a functioning corporate governance is missing.”

Until a forced resignation this spring, the company was dominated by Ferdinand Piëch, 78, the grandson of Ferdinand Porsche and the father of 12 children. He reigned over Volkswagen’s supervisory board and directed a successful turnaround at the luxury brand Audi before taking the reins at its parent, Volkswagen, in 1993. Mr. Piëch set the goal of Volkswagen’s becoming the world’s largest automaker by sales, a goal the company achieved this past year. He stepped down as chairman in April after unsuccessfully trying to oust the company’s chief executive, Martin Winterkorn, who himself was forced out this week.

One measure of Mr. Piëch’s influence: In 2012, shareholders elected his fourth wife, Ursula, a former kindergarten teacher who had been the Piëch family’s governess before her marriage to Ferdinand, to the company’s supervisory board.

6. China's porous capital controls - This piece in The Economist on how to get money out of China via Macau (and elsewhere) is an eyeopener. Remember that US$150 billion was sucked out of China in August alone, which forced China to devalue its renminbi and then defend the currency, along with trying to reimpose capital controls.

I see overnight that China’s State Administration of Foreign Exchange has capped the amount UnionPay cardholders can withdraw, at 100,000 yuan, or NZ$25,000.

Here's how it's done:

Faced with this exodus, the government launched a crackdown on underground banks, which run money across borders and arrange for matching onshore and offshore transactions. Police raided Macau’s pawnshops and arrested 17 people for laundering money. That appears to have slowed things down. When your correspondent visited pawnshops in Macau this week and asked whether they could help him shift 1m yuan ($157,000) out of China—three times what one can legally withdraw in a year—most demurred.

Still, a few said they would oblige, offering to pay the money out in stacks of Hong Kong dollars for a fee of only 3%. Jack, for his part, explains that it used to be easy to do big transfers in one go. Now, it is safer to break them up into smaller pieces to avoid attracting attention.

With its garish casinos and jewellery stores, Macau is the flashiest of the conduits for taking cash out of China. But there are plenty of others, some for much bigger transactions. Overpaying for imports, buying fake consultancy services and forging deals with foreign subsidiaries are all common. On Taobao, an online marketplace, it is possible to find vendors who offer cross-border currency trades.

7. And plenty want out of China too - This South China Morning Post piece on Chinese investors worried about a falling currency and looking to buy property overseas to protect their wealth is indicative of the risks, both for China and the likes of New Zealand.

Eric Ye owns an interior design company in Nanjing and had been weighing up whether to buy a home overseas for three years. Then the yuan's fall against the US dollar pushed him to take swift action.

On Thursday morning, the 32-year-old caught the earliest train to Beijing to check out the capital's Real Estate Trade Fair, the biggest event of its kind in the country.

"I believe the yuan's exchange rate will continue falling. It would be better to have some assets in foreign currencies. The sooner the better," Ye said, taking a particular interest in popular destinations like New Zealand.

Ye is one of a growing number of well-off mainlanders who are ramping up their offshore asset portfolios in expectation of a weaker yuan.

8. The money supply waiting to get out of China is enormous - This FT piece points out just how much money was created inside China between 2007 and 2013, and which is now bursting to get out to buy assets elsewhere.

China’s broad money supply growth between 2007 and 2013 was greater than that of the rest of the world combined, spurring the country’s rapid economic expansion but creating the risk of asset price bubbles and widespread loan defaults.

Analysis by Ousmène Jacques Mandeng, a former deputy division chief at the International Monetary Fund, suggests China’s broad money rose by $12.9tn in the seven years to 2013, outstripping the $11tn rise of the rest of the world.

“The Chinese money wall may well dwarf anything in the international financial system including unconventional monetary policy [such as quantitative easing],” says Mr Mandeng, who describes China’s growth of M2 broad money — a measure that includes cash in circulation, savings and time deposits — as “scary”.

The surge in money supply is also likely to have helped fuel bubbles in China’s property and stock markets, particularly given the restrictions placed on investing overseas.

Beijing is slowly opening up its economy, but Mr Mandeng argues that any liberalisation that allowed significant sums of money to leak out of China could destabilise asset prices in the rest of the world.

“How do you deal with this monetary overhang when you want to liberalise?” he asks. “If China opens up and you have these money balances looking for assets abroad, given the size of it, it can have a significant impact. So far we have seen very modest flows, such as into London housing, and we are already seeing the effect.”

9. And China hasn't even started printing yet... - The same FT article then looks at what happens when China's big trade surpluses start to dry up the stimulus from inward capital flows of foreign currency.

Mr Howell argues that whereas Chinese authorities have previously relied on foreign currency reserves to expand their financial system, they will now be forced to print money, in the form of QE to facilitate decent credit growth. This in turn will result in a weaker currency and an exodus of foreign investors.

“The Chinese will have to print money. That is predicated on the economy growing quite fast and that you have quite a leaky capital account. If they print money, foreigners are likely to flee,” he argues.

10. Totally Clarke and Dawe host Gerald Mander, who is a culling contractor...