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Friday's Top 10 at 10 with NZ Mint: America's rolling bankruptcy; Can China start consuming?; 'Restructure the Euro debt'; UK peasants start revolting; Angry fecking Irish; Dilbert
Here are my Top 10 links from around the Internet at 10 to 1 pm, brought to you in association with New Zealand Mint for your reading pleasure.
I welcome your additions and comments below, or please send suggestions for Monday's Top 10 at 10 via email to email@example.com.
I'll pop any surplus suggestions I get into the comment stream
1. It's getting ugly over there - The political battles over the budget in America are getting ugly. James Pethokoukis at Reuters reports that Republicans want to drive US states and cities into bankruptcy so public worker unions can be crushed. It all underlines the awful mess than American state and city finances are in.
Let's face it.
The world's largest economy is basically bankrupt.
No matter which way it's painted, America needs to restructure its debt or inflate it away.
The Fed seems to be choosing the latter option.
The problem is it's inflating away the value of the world's reserve currency.
Meanwhile it's political warfare down at the grassroots and in the legislatures.
The numbers are astonishing. The unfunded state liabilities are worth up to US$3 trillion. And that's before anyone starts on the unfunded Federal liabilities.
The most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds.
The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.” In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier.
Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.
2. The Chinese consumption story - The developed world needs China to start consuming more and exporting relatively less. New Zealand's future rests on this trend actually happening. There's a long way for China to go, Reuters' Alan Wheatley (and old squash partner of mine from my Singapore days) explains in this excellent long feature about Chinese consumption.
Spending might be sturdy in China, but investment has been off the charts. As a result, consumption was just 35.6 percent of Gross Domestic Product in 2009, from 46.1 percent a decade earlier - and that was helped by a massive government stimulus to counter the global financial crisis.
The task for China's policymakers is to lift that proportion by boosting wages, speeding up urbanization and building a social safety net so people do not need to save so much for a rainy day.
"Consumption will be the story of the next five to 10 years, and because we're talking about a fifth of humanity, it will have a huge impact on global business," said David Gosset, director of the Euro-China Center for International and Business Relations at the China Europe International Business School in Shanghai.
Still, he doubted China's consumption share would reach the roughly 60 percent rate of the European Union, let alone the 70 percent rate of the United States.
"The Chinese will never consume as we do in the West, especially in the U.S."
Some juicy factoids are spread through the article.
German sports goods company Adidas AG plans to open more than 2,500 stores in smaller Chinese cities by 2015.
One statistic dramatizes this imbalance at the heart of China's economy: the share of national wealth going to workers as wage income plummeted to 39.7 percent in 2007 from 53.1 percent in 1998. Seen in that light, it is no wonder consumption has contracted as a share of GDP. But could China be on the cusp of change? The National Bureau of Statistics (NBS) yearbook shows wages have surged and accounted for 46.6 percent of GDP in 2009.
Consultants McKinsey & Co expects China by 2025 to have 221 cities with more than one million inhabitants, compared with 35 in Europe today. Zhengzhou, the capital of Henan, China's most populous province, will have a bigger economy than Sweden, Hong Kong or Israel by 2020, according to the Economist Intelligence Unit.
3. European debt restructuring is inevitable - Berkeley Economics Professor Barry Eichengreen writes at Project Syndicate that a restructuring of European debt is inevitable.
The crisis countries have, in fact, shown remarkable resolve in implementing painful cuts. But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched.
This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks.
This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression. So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.
4. The Great Property Debt Death Spiral - Bloomberg reports US home values are poised to drop by US$1.7 trillion this year, according to property valuer Zillow.
U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow Inc., a closely held provider of home price data.
This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company said today in a statement. Zillow’s report is similar to other forecasts for prolonged weakness in the U.S. housing market.
U.S. home prices will decline as much as 11 percent by 2012 as weak demand and rising inventory extend the housing slump, Morgan Stanley said in a report yesterday. Prices will be as much as 36 percent below their 2006 peak before finding a bottom, Morgan Stanley analysts led by Oliver Chang wrote. Sales will stay “depressed” through next year amid tightened lending standards, they said.
6. The peasants are revolting - The economic crisis in Europe will eventually morph into political crises as very grumpy voters protest at being sacrificed to protect the bonuses and profits of bankers and their shareholders.
Here's an early taste in Britain. The Telegraph reports Charles and Camilla were attacked as they tried to drive through a protest in London against a tripling of student fees. There's an extra intergenerational wealth transfer twist to the anger of the protestors too.
Here's an eyewitness.
“We couldn’t believe it. The car had really big windows so Charles was very much on display. People were trying to talk to him about tuition fees at first but when more people realised what was happening, the crowds swelled and people were throwing glass bottles and picking up litter bins and throwing them at the car. You could hear all this smashing.
“There was one protection officer in the Jaguar behind, dressed in a tuxedo, and he was opening the car doors and using them to bash people away. His car took a real pummelling. “It must have been frightening for them but, throughout it all, Charles was really calm and smiling at everyone. Camilla was beaming too.
He was holding his hands out towards them in a gesture that said, 'I’m innocent’.”
7. The ECB is the only buyer - Morgan Stanley's bond desk reports (via Zerohedge) that the only buyer of Greek, Portugese and Irish bonds in the market at the moment is the European Central Bank. Buyers are on strike. This European crisis is far from over.
For what its worth, in conversation w/ one of my bond guys, it seems as though people are still fearing the EUR debacle. ECB is the only buyer out there right now.
8. Is Italy next? - Credit Writedowns notes there are rumours that Italy's credit rating may be downgraded. Here's more detail and a useful table showing New Zealand's ranking in the sovereign risk table. Ours has worsened most of the lot since June.
10. Totally Feckin frank video on the Irish situation - A warning. Turn down the sound if you have sensitive bosses and co-workers.
My favourite question: "So I'm sensing a little bit of discontent then..."