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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

Posted in Opinion

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 bernard.hickey@interest.co.nz.

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.

Related Topics

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...

Sound familiar?

Here's Chalk:

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.

Visit msnbc.com for breaking news, world news, and news about the economy

 

Bonus 11. Totally what the Fed really said to the stock markets.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

18 Comments

But Beijing has a secret

But Beijing has a secret weapon to sort out pissed off peasants...besides shooting them...food...give the peasants heaps of food...good Kiwi Beef Lamb Venison Pork Possum Rabbit Goat and ....no not fish..none left....milk powder ice cream and err ummm shellfish.

Happy Chinese peasant = happy Kiwi farmer.....

#10. It took a few secs for

#10. It took a few secs for Dylan to warm up...but he did a chimera of Wolly and Bernard!

# 10 is awesome...he nails

# 10 is awesome...he nails it...the problem and solution is obvious..the lobby system in the US needs to be replaced with public funding for political parties...there you go, problem solved...if anyone has seen the move Casino Jack, about the Jack Abramoff scandal in Washington...you'll know what I mean.

"He points out Chinese

"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...

Sound familiar?"

Nope. In NZ, either you save, or you put all your money into property. VERY few people can or will do both.

The Blue Star bond deal snuck

The Blue Star bond deal snuck through. Ma & Pa to take their haircuts. Here's a press release from private equity owner Champ:

The Board of Blue Star is pleased to announce that Bondholders have
approved the revised Amendment Offer. At a meeting in Auckland today
Bondholders voted 76.9% in favour of the refinancing proposal,
surpassing the required 75% approval.

Bondholder approval of the Amendment Offer was the final requirement to
give effect to the proposed refinancing package, which is essential to
the group's future. The package includes the extension by senior lenders
of existing funding lines, the provision of further liquidity and the
easing of covenants, plus the provision of $15 million in new funding by
the group's principal shareholder.

Blue Star managing director Chris Mitchell acknowledged that the
decision had been difficult for Bondholders.

"The Board appreciates the decision of Bondholders to give this company
time to demonstrate that it can deliver on the repositioning and
restructuring that it is undertaking to drive higher levels of earnings.
Improved performance is the key to Bondholders receiving some or all of
their investment back."

"The Company remains confident in its plan."

Under the terms of the Amendment Offer Bondholders will receive their
first interest payment in October 2013.

Mr Mitchell said "the approval of the refinancing package means that a
cloud has been lifted from the company. We now have the financial
confidence to be able to move forward and deliver on our strategies. Our
staff, suppliers and customers have been hugely patient through these
difficult times and I thank them for their support."

re #4 and tax flight - i've

re #4 and tax flight - i've been saying that for years. 

i reckon high earners use it as a tactic when threatened with higher tax, but i'm fully prepared to call bullshit on them. put the tax up for high earners (i'd probably go $200k+) and see if they flee. i bet they don't

No, I like NZ and fully

No, I like NZ and fully intend to stay, so you win your bet, but don't expect to get the tax revenue you think would occur if you put tax rates up big time.  Even the great dictator, Muldoon, found that out when he hiked it to 66%. You might recall he even prompted Bob Jones to fund a political party to take votes from National to ensure Labour would win in 1984 (who promised to lower the rate to 33%)

Re. # 5 : Channel 9's report

Re. # 5 : Channel 9's report : A single tear rolls down my gummy cheek ( I only have one buttock .... ha ! ) ......

...... these families borrowed to the limit .... not conservatively short of it ..... they voluntarily borrowed to the limit to purchase their  McCobber-digger-mansions , on the Goat Coast .

Boo-bloody-hoo for them ! ...... They screwed themselves . .

... .. And yet only 1 in 50 of those families are going bankrupt because of their stupidity .

Truely it is the lucky country , when you can max out the mortgage to the eye-bleed level , and the odds are still  98 % that you'll stay solvent . Not exactly a property melt-down of American proportions , is it .

Hang in there Prof. Steve Keen : Keep prediciting calamity , it may happen , and even if it doesn't .... your failed extremist prognostications are keeping you in the news !

  Is The World Going

Spiegel staff are dreamers.

Spiegel staff are dreamers. They have an expectation that current politicians and/or governments might achieve this:

So the economic prosperity of the West hinges on whether governments are capable of thinking in new dimensions of time. They finally need to start thinking further ahead than the next election.

Here is the latest Credit

Here is the latest Credit Default Swap ranking at the 5-8-2011

http://verlorenegeneration.de/landerisiken-im-uberblick/

Notice NZ is just below USA and where France sits 47 down from 58 and Italy 16 down from 29.

Put thru Google to translate.

Perhaps once France gets

Perhaps once France gets attacked by the markets , people might realize that , yes the world is bankrupt & being taken down sovereign state at a time.
BOE revising it's forecasts down for the second time , the "recovery" is stalling , joke !

Right on cue, Ben Bernanke

Right on cue, Ben Bernanke announces he will keep interest rates at 0% for a couple more years, Wall street revives and Ben B is likely to get extension of term at the Fed...Obama hijacked again..by the Money Bags.

#11 -- Was John Key just on

#11 -- Was John Key just on another US tv show?

 "Britain’s police

 "Britain’s police forces could face a bill for tens of millions of pounds from insurance companies because property was damaged in the rioting while the “police effectively failed to keep law and order”. telegraph

And the Police will pass the bill to the govt.

And the govt will have to cut more spending or raise taxes.

And the end result will be even fewer jobs for the shites that did the burning looting and smashing.

And the hanky wringers will demand an increase in dole payments and blame wealth inequality for the thuggish behaviour of the mindless shites. 

For a few years now,  the

For a few years now,  the FED´s sole mandate seems to have been preventing Market crashes.

The US Govt are obviously

The US Govt are obviously trying to prevent a repeat of the 29 crash where the market was down 80%. All those baby boomers coming up for retirement with their 401k, mutual funds etc etc. That would make a whole lot of people reliant on the govt, something they can ill afford looking at one of the bigger picture issues.