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Monday's Top 10 with NZ Mint: King Tupou V's pith helmet; The legacy of American baby boomers; How Inequality creates debt and slows growth; John Key's lack of ambition for NZ; Dilbert
Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.
I welcome your additions in the comments below or via email firstname.lastname@example.org.
I'll pop the extras into the comment stream. See all previous Top 10s here.
My must read today is #3 and the academic paper that goes with it. When the IMF starts talking about inequality and debt then you know the subject has gone mainstream.
1. Michael Field and the King of Tonga - I'm a big fan of Fairfax journalist Michael Field who has been pushing the slave fishing story and is a fearless reporter on Pacific issues.
He has been kicked out of and banned from a bunch of less-than-democractic Pacific states.
He pulls no punches.
I got a feeling he won't be invited to the funeral.
The detail is extraordinary:
In the diplomatic world he was regarded as something of a parody, showing no interest in Tongan or South Pacific regional affairs, but keen to discuss the battle order of the Warsaw Pact nations. He once said Tongans were squatters who "left to their own devices they would urinate in the elevators. As it is, they see nothing wrong with allowing their pigs to run all over their townships leaving pig droppings everywhere."
He wore a rich array of military uniforms complete with self-awarded medals. He was an avid collector of toy soldiers and staged Agatha Christie-type murder mysteries in Nuku'alofa for his friends.
He said he had written a Tolstoy-esque novel on Russia and wearing a pith helmet, goggles and riding pants, he filmed and directed a television documentary on remote Mongolian tribesmen.
2. The legacy of the baby boomers - 'Tyler Durden' of Zerohedge points to some charts showing (he says) the legacy of baby boomers in America.
The US economy, as represented by its Balance of Payments, the profligacy of the US consumer, the massive expansion of consumer leverage, and the collapse in US manufacturing jobs, and specifically its current near-terminal state, is as much as legacy of the baby boom generation's actions (and lack thereof), as of everything else that has already been mulled over and scapegoated an infinite number of times in both the mainstream and fringe media.
3. How inequality grows debt and slows growth - Eurozine interviews IMF economist Michael Kumhof in this piece. Kumhof co-wrote the IMF article in 2010 that argued wealth and income inequality slows economic growth and increases debt.
Kumhof considers the cause of the financial crisis in 2008 and the debt crisis in 2011 to be increased inequality, especially in the United States. He has argued that in order to avert future crises, the negotiating position of the majority vis-à-vis the very rich needs to be strengthened. "I bet you've never heard an IMF economist call for increased salaries before. This is highly controversial", he says. But for an economist with hands-on experience in corporate banking who is vexed by economists who fail to anchor their theories sufficiently in the way the world actually works, it makes perfect sense.
In an article co-written with Romain Rancière in 2010, Kumhof argues that increased gaps in income have led to increased household debt ratios. Nations with major income disparities tend to have the highest debt quotas, the largest financial sectors and often the biggest trade deficits. The richest five per cent of the population lends parts of its wealth to the remaining 95 per cent via an inflated financial sector. The rich try to find ways to invest their surplus wealth, while the less well-off majority attempt to maintain the level of consumption they have grown used to but no longer can afford. The result is increased indebtedness and the gradual build-up of a debt crisis. The only way of sustainably minimising this debt is to reduce income inequality.
Part of Mr Key’s appeal is his disarming honesty, and that was indeed the case – but in a way that revealed how un-ambitious his government is.
Mr Key admitted his interest-free student loans policy is bad economics and “a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt.” Nevertheless, he declared, it is “great politics.”
Students don’t show up to the polling booths, Mr Key explained, but inflation-adjusting their loans would “get them out of bed before 7 o’clock at night to vote, [so] it’s not politically sustainable.”
This is an interesting justification for a policy costing over $300 million a year. Most disconcerting is Mr Key not backing himself to sell such policy no-brainers.
5.One way to spend bailout funds - Bloomberg reports the government of Italy paid Morgan Stanley US$3.4 billion to unwind derivatives contracts that had backfired...
Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired, said a person with direct knowledge of the Treasury’s payment. It was cheaper for Italy to cancel the transactions rather than to renew, said the person, who declined to be identified because the terms were private.
The cost, equal to half the amount to be raised by Italy’s sales tax increase this year, underscores the risk of derivatives countries use to reduce borrowing costs and guard against swings in interest rates and currencies can sour and generate losses for taxpayers. Italy, with record debt of $2.5 trillion, has lost more than $31 billion on its derivatives at current market values, according to data compiled by the Bloomberg Brief Risk newsletter from regulatory filings.
6. 'We all need to save more' - The Economist points out here that investors who are betting on high returns from equities to dig themselves out of a savings hole are kidding themselves.
Many pension funds were counting on equities to keep rising, and—notwithstanding dodgy accounting which, in the public sector, is hiding some of the holes—are now in deficit as a result. The problem is widespread, but sharpest in American local-government pension funds, most of which assume that their investment portfolios will earn 8% a year and fund their schemes accordingly. They invest in a mixture of equities, Treasury bonds (which currently yield 2%) and corporate bonds (which yield 3-4%). If the risk premium is four percentage points, then equities will earn 6%, and pension funds will fall well short of their target. Those pension funds will either have to increase contributions sharply, which means raising taxes or cutting services, or reduce benefits, which may mean prolonged battles with the trade unions and in some cases may require changes in state constitutions.
Individuals who are funding their own pensions, or who are members of less generous defined-contribution schemes from their employers, also need to take note. They should save more. If they want a comfortable retirement their contributions need to be more than 20% of current salary, rather than the current average of just 10% or so.
The high returns from equities in the late 20th century made investors lazy. Such returns may not come back. If employees want a decent retirement income (or if employers are to keep their promises), they must put more money aside.
7. Another way to block reform - Gretchen Morgenson writes at the New York Times about how some global banking lobbyists plan to use World Trade Organisation rules to stop attempts to regulate banks.
Back in the 1990s, when many in Washington — and virtually everyone on Wall Street — embraced the deregulation that helped lead to the recent crisis, a vast majority of W.T.O. nations made varying commitments to what’s called the financial services agreement, which loosens rules governing banks and other such institutions.
Many countries, for instance, said they would not restrict the number of financial services companies in their territories. Many also pledged not to cap the total value of assets or transactions conducted by such companies. These pledges also appear to raise trouble for any country that tries to ban risky financial instruments.
So far, no countries have asked the organization to challenge rule changes like those made in the United States under the Dodd-Frank law. But rumblings of such an objection emerged in late December, in a comment letter sent to United States banking regulators. That letter criticized elements of the Volcker Rule, which is intended to prevent financial companies from making bets for themselves with deposits backed by taxpayers.
8. How America avoided a Fascist Coup in 1933 - Jesse's Cafe Americain points to evidence of a plot to overthrow FDR in 1933.
It was exposed by a Marine General who had helped many large businesses do similar things in Latin America and was asked to do the same in America.
9. Europe's two depressions - Paul Krugman compares the slump in Europe's production since 2007 with the one after 1929.
He says it's better this time than last, but not by much.
"The dangers of carbon dioxide. Tell that to a plant!"
"You can't drive a car with a windmill on it."