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Thursday's Top 10 with NZ Mint: The mathematics of growth for cities and companies; How 0% rates are numbing investors and economies into zombiedom; IRS on the warpath

Posted in Opinion

Here's my Top 10 links from around the Internet at 1 pm in association with NZ Mint.

I welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

My must watch today is #10 on the politics of aspiration.

1. The surprising maths of cities and corporations - This is a great TED Talk from Physicist Geoffrey West on how cities and companies grow at different rates.

Every week a million people migrate to cities around the world.

He points out very few cities fail, but all companies eventually fail.

He has a scientific theory of cities. He believes that complex systems from organisms to cities are in many ways governed by simple laws -- laws that can be discovered and analyzed.

His summary is that cities and societies seem to keep innovating to maintain hyperbolic growth, whereas animals and companies don't because their growth is linear and the relationship is less than one.

Here's the TED summary and the video below is well worth watching.

Physicist Geoffrey West has found that simple, mathematical laws govern the properties of cities -- that wealth, crime rate, walking speed and many other aspects of a city can be deduced from a single number: the city's population. In this mind-bending talk from TEDGlobal he shows how it works and how similar laws hold for organisms and corporations.

2. Liquidity traps - The monthly investment newsletter this month from PIMCO's Bill Gross on the zero bound problem for interest rates has got people talking.

I linked to it a few days ago. To refresh, the zero bound problem is where bond investors are reluctant to invest when interest rates are near zero because there is little prospect for capital gain. They end up leaving their money under the mattress and the economy goes into hibernation.

Gross' piece has caused a stir because it implies the developed world is now stuck in a Japanese-style grinding rececession/depression that could last many years and keep interest rates trapped near zero for a very long time. He is essentially criticising the Fed's ZIRP (Zero Interest Rate Policy) for creating a liquidity trap.

Here's Philip Pilkington criticising the piece via Naked Capitalism, saying Gross wrongly references Hyman Minsky and John Maynard Keynes.

Gross is trying tell the world that ZIRP policies might be stalling recovery and there is certainly a case to be made that the ZIRP policies are, at best, a two-edged sword – indeed, there’s the even more important case to be made that ZIRP policies may be leading inflation hedgers to pour into the commodities markets, causing both an unsustainable bubble and rising price inflation for households. So, you have to sympathise with Gross for swimming against the tide in this regard.

3. 'Numb and sedated' - Financial markets seem strangely relaxed and quiet at the moment, despite all the geo-political tension flying around in Iran (see below), Syria and Greece.

Bloomberg does a nice job of explaining why investors seem comatose.

The ZIRP drug is working. No worries. The money printers will always save the banks (and bankers...)

“Investors are numb and sedated,” Jeffrey Sherman, a commodities money manager who helps oversee $25 billion for DoubleLine Capital LP in Los Angeles, said in a Feb. 7 telephone interview. “Money sloshing around the system leads to lower volatility.”

“Bottom line is we moved away from the disaster scenario and now it’s being endorsed or even underwritten by central bank activity in the U.S. and Europe,” Rob Robis, head of fixed- income macro strategies in Atlanta at ING Investment Management, which manages about $160 billion, said in a Feb. 7 telephone interview. “It makes sense that volatility should be coming off because you’ve taken that systemic risk out of the equation.”

4. The theme of the decade - Reuters reports that the US Treasury (at the behest of the Internal Revenue Service (IRS))) has enlisted five European Union nations to crack down on offshore tax evasion.

We saw earlier this month the near collapse and forced sale of Swiss private bank Wegelin after the IRS swiveled its gunsights on the bank. All it took was a warning from the IRS to unleash a run on the bank.

We will see a lot more of this in years to come. Stressed governments, particularly in America and Europe, will beat up on anyone (foreign government or bank or company) who might be harboring tax evaders.

Any government that tries to set up tax havens will be suspect. This should be more than enough of a reason for John Key's government to quietly drop its idea of becoming the Switzerland of the South as a 'tax preferred' funds management hub/haven.

The current issue is around US legislation called FATCA aimed at targeting US citizens with accounts elsewhere. Here's Gareth Vaughan's backgrounder on this from last year.

FATCA kicks in from 2013. The question for New Zealand is whether we will be join the five 'special' FATCA partners referred to below:

Here's Reuters on the latest IRS-inspired drive to catch the tax evaders:

Under (US) Treasury's proposed "new government-to-government framework for implementing FATCA," the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.

Treasury said that once these five "FATCA partner" countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.

In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.

For nations not invited to become "FATCA partners" with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.

5. Iranian stress - Reuters reports the anti-nuclear sanctions on Iran's banking system and its export/import finance are beginning to bite hard with food prices rising sharply on the streets in Iran.

Tehran is having trouble buying rice, cooking oil and other staples to feed its 74 million people weeks before an election. New U.S. financial sanctions imposed since the beginning of this year to punish Tehran over its nuclear program are playing havoc with Iran's ability to buy imports and receive payment for its oil exports, commodities traders said.

Iran denies that sanctions are causing serious harm to its economy, but Reuters investigations in recent days with commodities traders around the globe show serious disruptions to its imports. That is having a real impact on the streets of Iran, where prices for basic foodstuffs are soaring.

Traders in Asia told Reuters on Tuesday that Malaysian exporters of palm oil - the source of half of Iran's consumption of a food staple used to make margarine and confectionary - had halted sales to Iran because they could not get paid. Rice is one of the main staples of the Iranian diet. With the rial currency plummeting, prices have more than doubled to $5 a kilo at bazaars in Iran from about $2 last year. Maize is used primarily as animal feed, and the cost of meat has almost tripled to about $30 a kilo, beyond the budget of many middle class Iranian families.

6. The elephant in the room is Spain - Amid all the chatter about Greece and Portugal, Marshall Auerback points out via Credit Writedowns that Spain is the real worry in Europe.

Spain has virtually the highest non-financial private debt-to-GDP ratio of all the major economies. Its ratio is almost twice that of Italy’s. Its fiscal deficit last year was probably higher than the official estimates, close to 9% of GDP (the previous Socialist government routinely lied about its figures – in fact, no country, not even the US, has lied more extensively about the condition of its banks. Spain, relative to GDP, has the largest shadow real estate inventory in the world, with the possible exception of China, which probably doesn’t even have a reliable second or third set of books).

Nearly 50 per cent of willing workers under the age of 25 in Spain are without work and will remain like that for years to come. That will damage productivity growth for the next decade or more. It is an indication that the monetary system has failed and attempting to reinforce those failures with more austerity will only make matters worse. The new government’s proposed fiscal policy “reforms” are particularly toxic policy mixture for Spain.

Of course, the ongoing threat of a disorderly default in Greece also remains a potentially dangerous area if it is not contained by the ECB’s actions. But it’s more interesting to see what happens as the magnitude of Spain’s problems become more apparent. Will the troika tell Spain that a Greek style 70% haircut is not in the cards? Will they try to suggest that the government is rife with corruption, that the country is chock-a-block full of scoff-laws and tax evaders, and that the efficient Germans would do a much better job of collecting taxes?

7. Why Wall St should stop whining - Matt Taibbi tells it like it should be told at Rolling Stone in an article responding to an apologia for Wall St bankers in the New Yorker magazine

Listening to Wall Street whine about how it is misunderstood is nothing new. It’s been going on for years (often in that same mag). But if Sherman’s piece heralds a new era of Wall Street complaining about how it is not only misunderstood but undercompensated, you’ll have to excuse me while I spend the next month or so vomiting into my shoes.

The financial services industry went from having a 19 percent share of America’s corporate profits decades ago to having a 41 percent share in recent years. That doesn’t mean bankers ever represented anywhere near 41 percent of America’s labor value. It just means they’ve managed to make themselves horrifically overpaid relative to their counterparts in the rest of the economy.

To comply with the looming regulations, banks have begun stripping themselves of the pistons that powered their profits: leverage and proprietary trading. In the wake of the crash, Morgan Stanley and Goldman Sachs converted to bank holding companies to tap the “discount window,” the Fed’s pipeline of cheap funds that gave the banks an emergency source of liquidity. That move seemed smart then, but the stricter standards required of banks have now left them boxed in.

With all the major banks unable to wager their own funds on big bets, there’s a growing sense that the money that was being made during the Bush boom won’t be back. “The government has strangled the financial system,” banking analyst Dick Bove told me recently. “We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”

And the problem is...?

9. And the Greeks wriggle - Here's Zerohedge with the latest Greek shuffling back and forth, which has hit the euro

10. Totally Jon Stewart and John Hodgman on the Haves and Soon-to-haves. They debate the politics of aspiration. Our Prime Minister believes in the politics of aspiration.

These politics become hard to justify when you look at social mobility statistics (there isn't much and it's getting worse) and the quite startling shift in wealth and income that has gone on here and overseas in the last 30 years.

 

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?

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15 Comments

And now something for the

And now something for the folk building or owning at the beach!
"John Wahr of the University of Colorado in Boulder and colleagues, in a study published overnight (NZ time), found that thinning glaciers and icecaps were pushing up sea levels by 1.5 millmetres a year, in line with a 1.2 to 1.8mm range from other studies, some of which forecast sea levels could rise as much as two metres by 2100. "
http://www.stuff.co.nz/the-press/world/6388851/Scientists-melt-mystery-over-icecaps-and-sea-levels
What will 2 metres mean for the Avon river at the top of a king tide in a low pressure system?
or for the beachfront housing found all round the Nz coast...! and what about cliff erosion in Auckland?

To paraphrase J. M. Keynes

To paraphrase J. M. Keynes "in the future we will all be dead!"

Have I misunderstood

Have I misunderstood something but 1.5mm/yr for 88 years does not equal 2 meters?

Check this out Wolly, it's

Check this out Wolly, it's tsunami you need to worry about.
http://wattsupwiththat.com/2012/02/03/quantifying-sea-level-fall/

Great stuff OMG...Likely as

Great stuff OMG...Likely as not Apophos will sort the problem out...now as an insurance hedge what would you do...anchor your new beachfront cottage into the sand dunes on long piles ....or....build it in sections that can easily be trucked to a new site?
At my age, a beachfront cottage seems a great idea, then we factor in proximity to services...and it seems like a poor idea....In the end we went for an inland plot of quality soil a brief walk to the pub and shops, with a campervan to go and stay at the beach now and then when the weather is just right.

Houseboat Wolly, with an

Houseboat Wolly, with an umbrella to deflect the asteroid, LOL!

#1 can make a similar case

#1 can make a similar case for overshoot; yeast in a vat consume all the sugar until they die.
Humanity is doing the same thing - bit of a mistake to think the same rules of nature do not apply.
 

I hope the deal done last

I hope the deal done last year on the Peter Jackson film with John Key and the USA Film companies did not come with an extra special side deal on Dotcom?

I hope the deal done last

I hope the deal done last year on the Peter Jackson film with John Key and the USA Film companies did not come with an extra special side deal on Dotcom?

“It makes sense that

“It makes sense that volatility should be coming off because you’ve taken that systemic risk out of the equation.”
That sounds like a pre Lehman quote.  Everything was fine, and "priced in" untill it wasnt.

And the printing goes

And the printing goes on.......and on.............and on
"The Bank's Monetary Policy Committee voted to increase its quantitative easing programme, which will take the total assets purchased to £325bn since the process was first started in March 2009. It said the latest round of purchases would take three months to complete.
Interest rates were left on hold at 0.5pc as expected.
The Bank of England's decision to purchase £50bn of gilts will have an detrimental impact on pensions and annuity rates, experts warn.
Saga warns that the latest round of Quantitative Easing (QE) will be yet another devastating blow for pensioners, causing further damage to annuities and pension funds. This will harm – not boost- UK growth"
 
http://www.telegraph.co.uk/finance/personalfinance/pensions/9072101/Retirement-income-to-fall-as-Bank-of-England-embarks-on-another-round-of-Quantitative-Easing.html
This is a situation where the chief moneymen who dance to the banker tune, are desperate to protect the wealth of their mates and ensure they have a future in supping at the pig trough. The pollies also want a place at the trough, so they will go along with the printing. The smart and financially astute will leave the pound for the Swiss frank or the gold coins. The printing will not stop until the city of London is awash in banknotes. A one section journey on the tube will cost a ton of paper notes.

Big five US banks smacked on

Big five US banks smacked on hand by Feds as 'just' punnishment for 'Robo-signing' mortgage foreclosure fraud...not one bank official and most certainly not one bank boss is punnished....those defrauded of their homes to receive massive $2000 payouts.....wow
http://www.bbc.co.uk/news/business-16961355
Aint it great to know the filthy US govt is still able and willing to 'cut a deal' for old mates!

I am always amazed that

I am always amazed that producers send so much valuable "stuff" to the States for USD. Surely someone somewhere is getting the message that the US has a huge advantage with the reserve currency status they enjoy.
In the meantime enjoy earning these valuable Kiwi's and promptly spending them on real assets. Low savings rate my arse....how would they know how much precious metal people have?