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Thursday's Top 10 with NZ Mint: Britain's Zombie borrowers; Chinese shoppers hit Vegas; Wikileaks' peak oil scoop; Citigrouper spills the beans; Dilbert

Posted in Opinion

Here are my Top 10 links from around the Internet at 10 to 4 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 tomorrow'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

1. A flood of a different kind - More than a quarter of US mortgage borrowers owe more on the loan than the value of their home, CNBC reports.

Yet house prices are still falling.

The shock to American net worth from the housing crisis is much worse than the equivalent shock to US net worth during the Depression of the early 1930s when housing made up a much smaller portion of total net worth.

This shock to American savings is now playing out as a multi-year slowdown in economic growth that is effecting everyone.

Related Topics

People wonder why things just won't fire up again.

It's because the debt is too big.

It's like trying to flog a horse back to a gallop when it is carrying tonnes of lead in its saddle.

The only choices for the America are restructure or inflation. It has chosen the second option.

Here's CNBC's Diana Olick. HT Andyh in 90 at 9:

The number of borrowers who owe more on their mortgages than their homes are worth took a huge leap in the fourth quarter of 2010. A full 27 percent of borrowers are now “underwater” on their mortgages, up from 23 percent in the previous quarter, according to a new report from Zillow.

Foreclosure moratoriums and falling home prices are to blame. Adding to a slew of negative reports on home prices, Zillow found home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. The home buyer tax credit, which inflated home prices artificially in the first half of the year, resulted in a Fall hangover. Home prices plunged 5.9 percent compared to the fourth quarter of 2009.  

And here's the raw report from Zillow and their chart on US house prices.

2. Practical men are slaves to defunct economists - Robert Samuelson has some sensible and insightful things to say about the Global Financial Crisis over here at Wilson Quarterly.

The great delusion of the boom was that we mistook the one-time benefits of disinflation for a permanent advance in the art of economic stabilization. We did so because it fulfilled our political wish. Ironically, the impulse to improve economic performance degraded economic performance.

This happened once before, in the 1960s and ’70s, when academic economists—among them Walter Heller of the University of Minnesota, James Tobin of Yale, and Robert Solow of MIT—sold political leaders on an ambitious agenda. Despite widespread post–World War II prosperity, there had been recessions every three or four years. Invoking John Maynard Keynes, the economists said they could—by manipulating budget deficits and interest rates—smooth business cycles and maintain “full employment” (then defined as four percent unemployment) most of the time.

They couldn’t, and the effort to do so created the inflation that crippled the economy for 15 years. We still haven’t forsaken the hope for perfected prosperity. After the recent crisis, both liberals and conservatives offered therapeutic visions. Liberals promoted expanded regulation to curb Wall Street’s excesses. Conservatives wanted a less activist government that would let markets perform their disciplining functions. Both may achieve some goals.

The trouble is that, like generals fighting the last war, we may be fighting the last economic crisis. Future threats to stability may originate elsewhere. One danger spot is globalization. Economies are intertwined in ways that are only crudely understood. Supply chains are global. Vast sums of money routinely cross borders and shift among currencies. Countries are mutually dependent and mutually vulnerable through many channels: Supplies of oil and other essential raw materials may be curtailed; cyberattacks could cripple vital computer networks; manipulated exchange rates might disrupt trade and investment flows.

Economic activity has grown more international, while decision making remains largely with nation-states. Although the global economy has remained basically stable since World War II, there is really no good theory as to why it should stay so—and there are some signs (currency tensions, for instance) that it may not.

Overcommitted welfare states pose another threat. Most affluent nations face similar problems: High budget deficits and government debts may portend a loss of investor confidence, but the deficits and debts have been driven higher by massive social spending—on pensions, health care, unemployment insurance, education—that people have come to expect. Economics and politics are colliding. If the debt and deficits aren’t controlled, will investors someday desert bond markets, jolting interest rates upward and triggering a new financial crisis?

But if many countries try to control deficits simultaneously, might a tidal wave of spending cuts and tax increases cause a global depression? (The United States, Europe, and Japan still constitute about half the world’s economy.) These are all good questions without good answers. The underlying problem is that economic change seems to have outrun economic understanding and control. It’s widely believed that the financial panic and Great Recession constitute a watershed for global capitalism, which has been (it’s said) permanently discredited. Around the world, the political pendulum is swinging from unfettered competition toward more government oversight.

Markets have been deemed incorrigibly erratic. Greed must be contained, and the greedy must be taxed. These ideas reflect a real shift in thinking, but in time that may not be seen as the main consequence of the economic collapse. These ideas imply that capitalism was unsupervised and untaxed before. Of course, this is not true. Businesses everywhere, big and small, were and are regulated and taxed. Future changes are likely to be those of degree, in part because countervailing forces, mobile capital being the most obvious, will impose limits. Countries that oppressively regulate or tax are likely to see businesses go elsewhere. What looms as the most significant legacy of the crisis is a loss of economic control.

Keynes famously remarked that “practical men” are “usually the slaves of some defunct economist.” By this he meant that politics and public opinion are often governed by what economists (living and dead, actually) define as desirable and doable. In the years after World War II, the prevailing assumption among economists, embraced by much of the public, was that we had conquered the classic problem of booms and busts.

Grave economic crises afflicted only developing countries or developed countries that had grossly mismanaged their affairs. This common view is no longer tenable. It has been refuted by events.

3. 'Lord make me chaste, but not yet' - Jeremy Warner writes at the Telegraph about the conundrum facing the Bank of England and much of the rest of the developed world mired in housing debt. Consumers are so stressed that they can't handle higher mortgage rates. But inflation is taking off, forcing central banks to think about higher interest rates...

Eventually the debt is going get these economies...or the inflation will get rid of the debt...and if that happens we can give up on saving for another generation...

Ultra low interest rates have become a life sustaining prop for Britain's over indebted households. At the trough of the banking crisis, nobody either in or outside the Bank of England would have dreamt that nearly two years later bank rate would still be close to zero, still less would they have imagined that with the inflation rate bounding away towards 5pc, there might be a perceived need for yet more quantitative easing.

What was intended as emergency therapy has become the new normality. So seriously entrenched in the nation's psyche has ultra loose monetary policy become that it is now quite widely assumed the economy couldn't withstand almost any rise in interest rates without triggering mass household insolvency and another recession.  

Warner makes a very good point about incentives for savings.

Substantial numbers of homeowners look set to be plunged into negative equity. We've already seen a roughly 18pc nationwide fall in house prices since the peak. Market derivatives indicate that in nominal terms, house prices will be the same in six years time as they are now, which implies a real terms peak to trough correction of well in excess of 30pc. That's much bigger than occurred in the early 1990s, when millions found themselves in negative equity. Rising unemployment would deliver the final coup de grace.

I'm not saying this analysis is wrong, but I do question whether the maintenance of ultra low interest rates is the best way of insulating the economy from the consequences. Everyone agrees that the root of the crisis was borrowing too much and saving too little. To respond by forcing savers to offer a negative rate of interest to distressed borrowers just seems perverse. When you consider that most households in Britain are actually net savers, the policy looks more debatable still. The thrifty majority is being forced to pay for the sins of the profligate minority.  

4. Let's go to Vegas! - Shanghai Daily reports on a tour group of 800 rich Chinese visitors who hit Vegas at Chinese New Year. A sign of the new world, who is charge and how what they're up to.

This is what you can do with printed money. Launder it through the slots and shopping malls. HT Reece via email.

One woman, surnamed Hong, from Guangzhou, Guangdong Province, splashed out more than US$1,700 on skin care products in the department store. "The price is so cheap, half what I'd pay in China," she said. A couple from Guangzhou spent more than US$7,000 in Las Vegas, the second stop of their tour. The wife had to buy three large cases to pack the bags, shoes and skin care products they had brought.

The department store didn't have a sales figure for Saturday, said Tracy Anderson, a manager of Macy's. However, there had been a huge influx of Chinese tourists, at around 4,000 to 5,000, during the past week, added Anderson.  

5. Wikileaks' biggest story - Forget all the kerfuffle over the condoms and Qadaffi's nurse. The biggest Wikileaks scoop has come out on whether we have peak oil or not, courtesy of the Guardian. HT Kiwidave

Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil". Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

One cable said: "According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray."

6. Bailout pork - Bloomberg reports on how US government bailout money has been used to build flash hotels and other lurks that simply make existing companies and employees wealthier, rather than creating jobs...

Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it.

Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. Against Intent Money spent on high-end development could have been used to build more than 1,000 job-training centers, medical clinics and schools.  

7. The link between debt and growth - The IMF has produced this useful chart series and this instructive (if a bit ploddy) video on the relationship between debt and growth. The conclusions are not pleasant for the indebted developed countries (like ours).

8. We're as big as Kansas - Some may have seen a version of this chart before showing how big each US state's economy is relative to other nation states. Here's the latest version courtesy of the Economist. New Zealand is as big as Kansas.

9. Mea Culpa - Or in cruder language OMG. This Citigroup trader called Omer Rosen has spilled his beans at Boston Review on what was really going on inside Citigroup's trading desk over the last decade.

The cynicism and corruption bursts off the page. A stunning must read.

Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.I never heard this arrangement described as a conflict of interest. I learned to think we were simply smarter than the client. For unsophisticated clients, being smarter meant quoting padded rates.

For the rest, a bit of “legerdemath” was required. Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices. If a client requested verification of our pricing, we volunteered to fax a time-stamped printout of market data from when the trade was executed. One person talked to the client on the phone while another stood by the computer and repeatedly hit print. The printouts were sorted, and the one showing the most profitable rate for the bank was faxed to the client, regardless of which rate was actually transacted.

If a rate for the client’s specific trade was not on the printout, we might create rigged conversion spreadsheets for them to use in conjunction with the printout. Other sources of profit lay in details that clients thought were merely procedural but in actuality affected pricing as well. Once, a client called after his interest-rate swap was completed and asked to change a method of counting days. Unbeknownst to him, this change should have lowered his rate. I made the requested change but kept his rate the same, allowing us to realize unwarranted profit. This was standard practice. My coworkers knew what I had done, as did the traders, as did the people who booked trades. I even tallied the “restructuring” as an achievement in a letter angling for a higher bonus.  

10. Totally irrelevant Jon Stewart video - Because I'm in a hurry.

 

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
Exclusive - The Seven Deadly Sins - Anger Mash-up
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog</a> The Daily Show on Facebook

 

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18 Comments

 "The thrifty majority is

 "The thrifty majority is being forced to pay for the sins of the profligate minority"...oh yeah that's NZ alright...way to go Bolly...give us more spin Bill.

...... " Bailout pork "

...... " Bailout pork " ......... Hickey's starting to talk 'like you do  ........ You're seeping into his sub-conscious ........ Cool !

See if you can seep into his choice of hair-dressers , whilst you're at it .

#4 Is interesting, I keep an

#4 Is interesting, I keep an eye on the Las Vegas economy for several reasons, the local real estate statistics for Janurary show 51% of house purchases in Jan. were paid for in cash. Possibly the Chinese or cashed up investors are hitting the market in a larger way than suggested by the article.

Where are the local LV stats

Where are the local LV stats to be found?

Re 5 al-Hussein has been

Re 5

al-Hussein has been saying that for a long time.

note the date:

http://europe.theoildrum.com/node/5870

So it's not news to many of us.

What is news, is that it's news to the newsies. No wonder the wide-eyed growth exponents continue uninformed. Nobody is telling 'em.

Wonder why?

No wonder the wide-eyed

No wonder the wide-eyed growth exponents continue uninformed. Nobody is telling 'em. -

That's bcuz they all have their fingers in their ears, saying LALALALALALALA! - GDP Growth, GDP Growth, GDP Growth. 

They have been told, ASPO for

They have been told, ASPO for one has been loudly at it for years..........however before financial meltdown Gordon Brown for one ignored the advice that the melt down was coming....as did others, it wasnt what they wanted to hear....Peak oil is another msg they dont want to hear...once its heard its obvious that economies will start to shrink....the so called "trickle down" theory/crap where growing the economy makes us all rich as the rich spend more and it trickles down to the rest of us will be seen for the farce it is/was. Peak oil was known about in the 1960s........and earlier in speaches in the 50's...........it was said we'd use up all the resources and leave nothing for future generations....

Well the future "generations" are now here......so the BBs and their parents have effectively used most of the cheap raw materials and in many cases at least half or more, and worse they have calls on future raw materials income already spent in the form of leaving us debt.......and breed like rabbits to boot....

True inter-generatioanl theft on a massive scale....the end result is looking very

Malthusian

regards

 

 

That's right PDK, not news to

That's right PDK, not news to most of us, in fact it looks like all of OPEC's stated reserves are fudged to the upside. What is interesting is the US official's call to take this issue seriously while the official line (IEA etc) is that we've got fifty years of production plataue to transition away from oil dependancy.

Guess the reality that we are already past peak conventional oil was just to scary when fed into the growth projection calculations. Much more pleasant to play "let's pretend".

KiwiD - yes. Interesting to

KiwiD - yes.

Interesting to see 'Wolly's comments last night. If they're not a hook-bait/piss-take, you can see the problem. All the postings folk like us have put up here, all the links, and there's someone who (lets presume he's serious) is touting fleets of electric cars and windmills. Overstating gas reserves, and failing to address the energy density of same (I did point out that John Fleming nine-to-noon interview). No mention that the electric cars are made with fossil fuels, that global electricity is 70% coal-fired...

On OPEC - they all bumped up their claimed reserves in 1985 - the beginning of the agreement where their share of the total depended on their share of the reserves. Pidgeons are coming home to roost.

No wonder my Physic Prof talks of Cognitive Dissonance. Acknowledges he's out of his sphere of expertise, but that sooner or later you have to start wondering why they refuse to get it.

go well (go shell?  not for long.........)

:)

 

The .ppt off this site is

The .ppt off this site is nice and easy to digest for naysayers; http://www.transitionwise.org/

I would appreciate some

I would appreciate some comments about the "End Game" New Zealand is facing.  I see it this way:

The Government continues to borrow $300 m dollars a week to sustain current programmes.  How much of that money is being used to service existing debt?  In the absence of any new programmes and initiatives it would appear most of it is.  Am I wrong?

I believe English has adopted the strategy of maintaining the current course in the expectation that credit markets will collapse "somewhere else" first.  That when the whole system comes to a halt, as it almost did post Lehman, there will be a global reset; which includes debt forgiveness and investor haircuts.  In the meantime short term relief will be found through inflation.  Why else would the Government institute a GST rise in the face of stalled economy.  (My look at the labour market concludes that 3 out of  5 new jobs created in the last ten years were related to real estate and finance.  Those jobs have disappeared and are not coming back.)  The only other way to grow the economy is to throw open the doors to Immigrants with fat wallets. 

State-owned-assets, presently on the selling block, will offload some of the liability offshore but will not make much of a dent in our borrowing regimen.  Sadly, this last step smacks hauntingly like the Rogernomics agenda of days past.

The above is the upside possibility.  The other is that our Government is positioning itself for an eventual downgrade that will spiral into the hands of the IMF.  When that inevitability occurs, there will be a change in Government.  The Red Team will be able to blame everything on the Blue Team, the Blue Team will blame global trends, and the IMF will be the sword behind the disintegration of the Nanny State.

Am I a realist?

Your already in the end game

Your already in the end game Doug red team blue team its the same F*#$Ken team mate!

All of them world wide!

You are. How about : All

You are. How about : All immigration is ceased in the short term; say 10 years. As emmigration happens, comensurately reduce the welfare support systems to squeeze those unemployed into the vacancies left by those departing. The openings in specialised fields ( say, medicine) can be filled by those coming through the education system. Over the term of this short run, our standard of living may fall ( it probabaly is about to,  anyway, as you indicate) and a falling popluation and less welfare assistance ( as jobs replcae support) requires less foreign borrowings to sustian it. But as competition emerges for those jobs that remain unfilled due to a reducing population, wages can then rise, and based upon need and performance. When the system has re-set, have another look at immigration. But let's use our resident population, first.

I cannot actually imagine

I cannot actually imagine debt forgiveness actually happening.  Maybe it will, but the levels involved are so huge as to boggle the mind.  Surely nobody would then lend money (even fake fiat currency) again.  Maybe it will not be 'universal' debt forgiveness but somehow related to other thigs like, I don't know, military force.  Eg. US says to every other country that they're not going to pay back their debt.  Other countries have no option but to go along with it.  Much like when the US refused to exchange USD for gold, then moved off the gold standard.  Kind of... tough luck!

If on the other hand little old NZ tells everyone it's not going to pay back its debts, then I suspect things would not go well for NZ.

Oh well, guess we'll just have to wait and see.

 

al-Hussein   old news from

al-Hussein   old news from 2005 in Matt Simmons book

"Twilight in the desert"

Better wake up people and start making YOUR own plans for survival in the struggle, voting for puppet politico's is a waste of time and energy.

The AGENDA has nothing to do with making NZ hum as somewhere to live and our politicians take orders from others and that means all the parties. There all compromised. 

The past 30 years informs the thinking person of this reality.

Passive non compliance - vote for none of them!

 

 

 

Doug, our Government spends

Doug, our Government spends 112 mil a week on interest. Jkey said last week that %60 of new jobs since 2004 have been Government related. I think that getting rid of debt will have to be done with deflation. Im watching the unions pay demands with interest. If they get them unemployment will rise if they dont standards of living will fall.

 

 

http://theautomaticearth.blogspot.com/2011/02/february-8-2011-unstable-tower-of.html

 

Stoneleigh: The common ground where bargains acceptable to both sides of a dispute can be found is rapidly disappearing or already gone. All parties are looking for more in order to dig themselves out of a hole, when there is much less overall to go around. This creates a clear potential for an entrenched and confrontational mentality that can easily make matters worse.

Unfortunately deflation (the collapse of money plus credit relative to available goods and services) aggravates natural human impulses arising out of increasing scarcity. Under deflationary conditions, where credit can evaporate at lightning speed, the purchasing power of very scarce remaining physical cash increases. In other words, over time, a salary would go further than it used to, or alternatively the purchasing power of a salary could be maintained if the salary was cut. Employees would be very unlikely to see a salary cut in those terms however, and would likely become very defensive. People typically think in nominal terms, not in real terms, even though it is affordability that matters rather than merely price.

Squeezed employers are not going to be able to maintain the purchasing power of the salaries they pay. They will be looking to pay fewer people and to hand over less purchasing power to each remaining employee than before. Employees will have little or no bargaining power, either individually or collectively, under circumstances where unemployment is high and rising (for a very evocative illustration of this in relation to the Great Depression see John Steinbeck's The Grapes of Wrath).

Thx for that post, Andrew

Thx for that post, Andrew ! The Stoneleigh paragraph sums up all that I know will happen, in one concise writing.