Wednesday's Top 10 with NZ Mint: The problem with deflation; Australia's ugly house prices; Taxing capital inflows; Dilbert

Here are my Top 10 links from around the Internet at 10 past 12pm, brought to you in association with New Zealand Mint for your afternoon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. 'One more thing...' - Bill Gross from Pimco is the world's largest bond fund manager.

It could be argued he talks his book, which would prefer continually falling interest rates.

Bbut he does say interesting things and he has a big team of people thinking and researching the big issues of our age: deleveraging, financial system health and risks of inflation/deflation.

Now he's saying that a long term decline in population growth rates will add to the cumulative pressure on economies from deleveraging. He argues capitalism seems to depend on population growth to keep going and growing.

When it doesn't have population growth, it invents consumption through debt growth....

Since the 1970s we have never really experienced a secular period during which the private market could effectively run on its own engine without artificial asset price stimulation.

The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates.

Finally, in the U.S., with consumption at 70% of GDP and a household sector deeply in debt, there was nowhere to go but down. Similar conditions exist in most developed economies.PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages.

The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet.

Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success.

Try another way, Washington

2.  All eyes on jobs report - It seems this Friday's key non-farm payroll figures in the United States are being watched as the potential trigger for the next round of money printing by the US Federal Reserve, now widely referred to as QE II (Quantitative Easing II).  Here's the Bloomberg chew over of the current thinking on QE II. Friday's figures could push the Fed over the edge.

Officials indicated they may ease more should the economy falter after reports of a flagging housing industry and persistently high jobless rate. Options include strengthening the pledge to keep interest rates around zero, cutting the rate the Fed pays on excess bank reserves, or buying more Treasuries or mortgage bonds.

“You have to get a significant downward revision to their forecast that spills over into next year” to get the Federal Open Market Committee to vote for more easing, says Laurence Meyer, a former Fed governor and vice chairman of forecasting firm Macroeconomic Advisors LLC in Washington.

“The only thing that could push the committee to ease, or a signal that tightening is even further off, might be a worse- than-expected employment report,” he said.

3.Tied up in knots - The US Federal Reserve is worried about the appearance of printing money so is thinking all sorts of weezes to get around this. One idea is to collect the cash coming in from its monstrous pile of toxic mortgage bonds and use that to buy more bonds. The interesting thing is that the US economy seemed to stall at the very moment when it stopped buying bonds four months ago. Here's the Reuters report.

Federal Reserve officials will consider a modest but symbolically important change in the management of its massive securities portfolio when they meet next week, amid signs the economy may be losing momentum, the Wall Street Journal reported.

Any change only four months after the central bank ended a massive bond-buying program would signal deepening concern about the U.S. economic outlook, the newspaper said in the report on its website on Tuesday. Fed officials meeting on August 10 will consider whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead, the report said, without citing sources.  

4. The big picture - Max Fraad Wolff at HuffPo has written a broad piece on exactly what is happening in the world's largest economy. HT John Walley via email. It's worth a read to see the true extent of the problems there for those wondering why the US economy can't get started again.

We have seen non-housing credit available to American households fall further and longer than ever before over the last few years. Mortgage borrowing has followed a similar pattern and is presently $250 billion below where it was in 2008. Less credit is available to American consumers and they are taking advantage of less of the reduced credit available. Yesteryear's coping strategy- increasing consumer debt- has become a limiting factor.

Credit is not going to be the crutch on which we hobble forward during this difficult economic period. Millions of households are struggling to repay old loans and the net stream of new loans has been negative for 2 years. Banks are worried about lending and have balance sheets bloated with deposits that they are not interested in lending. Low rates, loads of bank cash and few loans define the world of American housing.

5. New house price comparisons - BankingDay in Australia has picked up on a new series of house price figures compiled by the Bank of International Settlements (The Basel guys).

Australia looks ugly.

We're not so ugly.

But we're uglier than America. Are we all braced yet?

The statistics, available here bring together for the first time housing price data from 37 countries. They show that since 1996, prices for existing Australian capital city dwellings are up 222 per cent.

That rise is larger than for almost any other developed nation. Australia is also one of the few countries to record substantial rises over the past three years – 29 per cent in the three years to March 2010.

The new statistics also confirm that New Zealand’s housing market has risen more moderately than many, up just 120 per cent since 1996.

And the figures suggest that US housing prices have risen more gently than those of most other advanced economies.

We've now gone through those figures and picked out the New Zealand ones. We've charted them now. Here they are.

'6. What the hell is going on' - Alain Sherter at Bnet has a nice line about the faith we have (had) in economists. He compares them (and us) to the Apes confronted by the Obelisk in 2001: A Space Oddysey" HT Hugh P via email.

As a species, it seems, homo economicus is almost as primitive as homo sapiens. Which is why it’s no surprise that every financial crisis is followed by much frantic shrieking and hopping around by businesspeople, economists, journalists and consumers. Old theories are torn down, older ones resurrected. We prod our once trusty quantitative models for signs of life. When new facts challenge our cherished beliefs — home prices always rise, markets are efficient — we bare our fangs.

Since the latest meltdown, much of the blame for this sorry state of affairs has correctly fallen on the “dismal science.” Thomas Carlyle’s description of economics turns out to be only half true, because there’s nothing especially scientific about it. Most of its practitioners value broadly descriptive, “elegant” ideas more than empirical observation.

Once adopted, theories turn hard as bone, which economists from rival clans use to club each other with. Worse, the profession apes the scientific method by emphasizing arcane financial math and half-baked experiments, often not to check underlying assumptions but rather to reinforce them. Intellectual bubbles inevitably yield financial bubbles, as “fat tails” smack us in the face yet again.

7. Tax on capital inflows? - South Africa is considering a tax on capital inflows to slow the rise in its currency (the rand) Bloomberg reports.HT John Walley via email.

The (rand's) gains “came at a heavy price” and made exports less competitive, the ruling African National Congress said in a discussion document posted on its website on July 30.

“A central debate is whether South Africa should tax short-run capital inflows,” according to the document, which also called for clarity from party officials who want South African mines nationalized.

8. China throws its weight around - The Chinese realise they're in an increasingly strong position, Bloomberg reports. HT Gertraud via email. How long before we see US Treasury yields spiking?

U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions.

China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

9. The problem with deflation - Paul Krugman thinks deflation is bad and explains why.

10. Totally irrelevant video - Things being destroy v.e.r.y. s.l.o.w.l.y

HT John via email.