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- What is the main reason why house prices have risen so strongly, particularly in Auckland, this year? 3
Wednesday's Top 10 with NZ Mint: Dylan Ratigan's epic rant against America's plutocracy; The Fed's expensive bridge to nowhere; Why China won't save us this time; Dilbert
Here's my Top 10 links from around the Internet at 3 pm in association with NZ Mint.
I welcome your additions in the comments below or via email to firstname.lastname@example.org.
I'll pop the extras into the comment stream. See all previous Top 10s here.
This will be short and sharp today because all sorts of hell is breaking loose on global markets and elsewhere.
1. An expensive bridge to nowhere - Mohamed El Irian runs the biggest bond fund in the world, PIMCO, so what he says (via CNBC) about the Fed's statement today is worth listening.
He says the pledge of two years of 0% rates is unprecedented, that the promise of new tools is risky and that the large number of dissenters on the FOMC (most since 1992) is worrying.
Yet again the Fed has ridden to the rescue of the stock markets.
When does the problem of moral hazard kick in?
Who cares about jobs?
Or is central bank action all about protecting stock market investors.
El Irian makes the good point that central bank action can only ever be a bridge to more effective government action.
That is by no means assured on either side of the Atlantic.
Once again, the institution came to the rescue of an equity market under severe pressure, and did so in a bold manner.
For the first time in history, The Fed announced that it anticipates “exceptionally low levels” for its policy rate — basically 0 percent — will be warranted at least through June 2013. It also reminded investors that it stands ready to use a range of other policy tools.
Judging from the three committee members that voted against it, Tuesday’s Fed decision was a difficult and controversial one. Indeed, this degree of public dissention, something that has not happened since 1992, is uncomfortable for an entity that prefers consensus and collegiality.
By boldly and controversially stepping up to the plate with an imperfect policy instrument, the Fed is again assuming considerable reputational and institutional risks. In the process, it ends up carrying even more of the policy burden.Like its counterparty in Europe (the ECB) last Sunday, the Fed’s intention is to provide a bridge for other, glacially-moving economic agencies. Let us hope that these agencies will finally get their act together. Otherwise, the Fed will simply be providing an expensive bridge to nowhere.
2. Whack-a-mole in China's housing market - The IMF's Nigel Chalk writes well here at IMFDirect about China's housing market.
He points out Chinese consumers save a lot and prefer property as a savings vehicle to low interest rate savings accounts because capital gains are higher and tax free...
All of these forces have led the real estate market in some of China’s largest cities to look decidedly bubbly.
The government has confronted these forces with a menu of measures. Such measures include limits on speculation and restrictions on purchases by non-owner occupiers, and the financial system is being protected through curbs on leverage and limits on loan-to-value ratios. These are all having a tangible effect, dampening prices and bringing down the volume of ‘frothy’ transactions while still sustaining a healthy pace of private investment and construction. It also seems that the government is getting better at calibrating these measures, in part through ongoing learning-and-doing.
Nevertheless, all of these efforts are still only treating the symptom of the problem—the pace at which house prices are going up—but the underlying impetus remains in place. Ultimately, the solution has to involve higher interest rates (on both deposits and loans), efforts to create a broader set of financial assets for the population to invest in, and a broad-based property tax that covers the majority of China’s housing stock. None of this will be politically easy and it will all take time. However, only this kind of deep-rooted change will create the environment where households view their apartments as shelter rather than as a (literal) concrete store of value.
Until then, policymakers will continue to have to periodically step back into the property market with successively tighter administrative controls, continuing to play Whack-a-Mole with China’s burgeoning property bubble.
3. 'America has never looked more Japanese' - Ryan Avent at The Economist reckons America is turning Japanese and the Fed's statement does nothing much to stop it.
The Fed's answer to the summer's economic developments is a tweak in the language, shifting the expected duration of exceptionally low federal-funds rates from "for an extended period" to "at least through mid-2013". Because the change provides more certainty about the expected window for near-zero rates, it counts as easing. It can nonetheless acurately be described as the minimum possible expansionary action.
Markets were hoping for more. Early gains in equity markets have mostly disappeared since the FOMC statement was released. Commodities are down again with the exception, yet again, of gold. And Treasury yields are plumbing new depths. As of this writing, the 10-year Treasury yields 2.11%—close to the 2.08% low hit in the depths of the 2008 economic meltdown. America has never looked more Japanese.
The statement clearly wasn't enough to restore confidence in continued growth; I'd go so far as to say that the Fed's timid action has increased the probability of a return to contraction within the year. It may nonetheless have broken the market panic; only time will tell. Should conditions continue to deteriorate, the Fed will probably step up its response, perhaps hinting at a renewal of its asset purchases at Jackson Hole or the September FOMC meeting. It seems ever less likely, however, that the Fed will avoid the " self-induced paralysis" that locked Japan into years of stagnation.
4. 'Tax flight is a myth' - A US study reported in the WSJ finds that higher tax rates in some states don't drive large scale flight of rich people to states with lower tax rates.
The weather angle is interesting.
Here's Robert Frank at the WSJ:
Tax Migration is not common: “On average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010, and only about 30 percent of those born in the United States change their state of residence over the course of their entire lifetime,” the study said. “When people do relocate, a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing, or a better climate. A person’s age, education, marital status, and a host of other factors also affect decisions about moving.”
The Rich Are Not So Different: After New Jersey hiked rates on incomes over $500,000, the net out-migration of this income group accelerated. But the net out-migration rate of filers with incomes between $200,000 and $500,000 was the same. At most, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. That compares with a revenue gain of $3.77 billion over the same period.
Weather Matters More than Taxes. Rich retirees are presumably the most mobile income group, since they’re not tied down by jobs and they can live where they please. But the study looked at rich flight from Oregon and found that weather, and a high concentration of other wealthy retirees “is much larger than the impact of the tax variable.” In other words, what rich people want is a sunny place with lots of golf partners–while taxes may be secondary.
5. Australia's big squeeze - Channel Nine's 60 Minutes has done a piece on the thousands of Australian suburbanites secretly going broke under the weight of enormous mortgages. HT Mish.
Here's the transcript:
Like most young couples, the Dodds invested their heart and soul and every spare cent they had into the ideal of home ownership – the biggest mortgage their double income would allow. But last June, Tracy lost her job in the construction industry and David was made redundant. Just to keep money coming in, he’s taken a lower-paying job. Ever since, the Dodds, like tens of thousands of middle class families have been going secretly broke in the suburbs.
This is the outskirts of the Gold Coast. When you look around and see the big, shiny new houses, the nice lawns and two cars in the driveway, you can’t help but think, ‘life must be pretty good here.’ But this version of the Great Australian Dream is just a facade – nowhere is mortgage stress being felt more keenly than right here. And the figures are staggering – one in 50 families are at risk of losing everything. The number of Australians behind on their mortgage repayments by more than a month is at an all-time high. Areas of mortgage stress can be pinpointed right around the country. Mostly in areas, that just five years ago, were booming. Families who borrowed to the limit in the real estate gold rush are the ones who are now struggling to pay their bills.
7. 'Inactive youth' - The Guardian published this economics report on July 22 on the jobless rate among the young in Britain. It shows 3 million 'inactive' young people not working, although many are in extended study.
What happens when they finish that study?'
Here's The Guardian:
There are fewer young people working than at any time in the past two decades, according to figures which show that one in five 16- to 24-year-olds are unemployed.
Figures from the Office for National Statistics show the "inactive" population – which comprises young people who are neither working nor unemployed – stands at nearly 3 million, the highest level since the data was first collected in 1992. The analysis says two-thirds of these 16- to 24-year-olds are staying on in education, perhaps to stave off unemployment.
This is the first time that the inactive population – which includes people who are in education, looking after family, retired, or sick and disabled – has been broken down and analysed in this way. It shows that 77.4% of them are now students, up nearly 3% on the same time in 2008 just before the recession hit.
ONS statistician Jamie Jenkins says the number of 16- to 24-year-olds in the inactive group is now so high it has pushed up the traditional unemployment percentage rate by making the workforce smaller.
8. The Great Repression in China even - Despite figures out overnight showing higher than expected inflation, Bloomberg now reports economists saying even China may delay rate hikes until early 2012.
China’s State Council said “relevant nations” should adopt responsible fiscal and monetary policies to maintain investors’ confidence, in a statement yesterday evening after a meeting chaired by Premier Wen Jiabao.
“We have an increased risk of a global recession, so China will not raise rates now,” said Wang Tao, a Hong Kong-based economist for UBS AG, who previously worked for the International Monetary Fund. China’s inflation has peaked and “food prices are already correcting,” she said.
A slower-than-estimated 14 percent gain in industrial production added to signs that moderating economic growth may assist in limiting price pressures. Sliding commodity costs may also help.
The State Council’s statement dropped previous language describing the fight against inflation as the nation’s top priority and policy makers are likely in a “wait-and-see mode,” Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch said in an e-mailed note.
9. 'Don't Bank on China' - China's economic growth still seems to be Great White Hope for the global economy and for New Zealand in particular.
However, Emily Kaiser and Koh Gui Qing from Reuters in Beijing write the rest of the world shouldn't bank on China rescuing the world like it did in late 2008 and early 2009.
It has too much inflation and it has already blown out its bad loans with high speed trains to nowhere.
China's fiscal firepower is not in doubt. With $3.2 trillion in reserves and low public debt, China could afford to kick up spending, but the side effect would be worsening inflation when prices are already rising too fast for comfort.
Beijing is particularly sensitive to inflation because relentlessly rising prices can stoke social unrest, which could be dangerous for the Communist Party.
Besides, the last round of stimulus in 2008 caused more than a few headaches that linger today. Beijing encouraged banks to lend freely to government projects such as railways, airports and roads. Some of the loans have soured, and local government defaults now pose one of the biggest threats to China's growth. Local government liabilities amount to nearly 27 percent of China's total annual output, so if the state is forced to mop up those bad loans its deep pockets would look a bit more shallow.
That means China would most likely rely on more modest measures if the economic outlook deteriorates. Possible steps include cutting taxes for small- and medium-sized businesses, ramping up investment in affordable housing, altering bank lending rules to get more money into the hands of smaller companies, and lowering interest rates.
10. Dylan Ratigan has a jolly good rant on MSNBC about the calamitous state of America's political and financial climate.
He slams Obama as useless. He says Congress is bought by lobbyists. He's right.
Bonus 11. Totally what the Fed really said to the stock markets.