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Thursday's Top 10 with NZ Mint: Why Goldmanites are Teletubbies and not Muppets; China's rebellious local governments; Chinese coup talk refuses to die down; Britain's 100 years of Financial Repression; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at 12.30 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 read today is #1. Financial Repression is real and long. Dilbert is back.

1. 'Say hello to 100 years of financial repression' - The British government plans to issue perpetual or 100 year bonds to help fund its deficit.

It is essentially saying that the next generation and the one after that can pay the bill for bank bailouts, income tax cuts and corporate tax cuts.

It's all part of the strategy of financial repression.

This is where central banks and governments force long term and short term interest rates lower than the inflation rate. They do this by printing money and buying long term bonds, and forcing banks and pension funds to buy government bonds through various capital and prudential requirements.

That erodes the real value of savings and destroys future pension funds as the inflation rate runs ahead of the interest rate.

This is in effect a silent (hope you don't notice) default over multiple generations.

Here's Edward Hadas from Reuters calling it as it is:

The issue of century debt in an era of financial repression would certainly be a potent one. Forget about the fate of those who bought perpetual bonds with a 2.5 percent coupon in 1946. Their real principal value has declined by 97 percent, and counting. Think about the present. At a plausible nominal yield of about 4 percent, the current real yield would be slightly negative – in line with the government’s inflation-linked debt.

As for more distant decades or centuries, it would take a monetary revolution for the UK to become a land of durably low inflation. The country has hugely indebted public and household sectors and a giant fiscal deficit. The central bank is clearly more interested in promoting GDP growth and reducing the strains of leverage than in keeping inflation low. That’s why it will soon own a third of the government’s outstanding net debt.

Those purchases undercut the normal explanation of ultra-low yields on ultra-long paper: that the market has given its objective judgment. With the Bank of England buying and regulators simultaneously requiring banks and other institutions to load up on supposedly safe gilts – ultra-long is especially recommended for pension funds – the market is so far from free that its verdict is gibberish.

2. Portugal is next and the ECB just bought time - Arnab Das from Roubini Global Economies says via this CNBC story that Porutgal will be the next European country requiring a bailout and none of Europe's fundamental problems have been fixed by the European Central Bank's mass money dump of the last 3 months.

While the ECB’s Long Term Refinancing Operation (LTRO) had dealt with liquidity issues it did nothing to address the deeper rooted problems affecting the euro zone.

“A lot of people are already asking, what about after LTRO? It’s been entirely about liquidity. There has been nothing about solvency of banks or the capitalization of banks and that’s what liquidity can’t solve,” Das said.

“Our view is that Greece is done, Portugal is coming and also Ireland. We will see more orderly debt restructuring within the euro zone as long as it’s not part of the 'too big to fail' economies like Italy and Spain,” Das added. He also said that the U.S. had managed its deleveraging process for its banking industry far better than the euro zone had.

“We are going to be in a bank deleveraging mode and leveraging in Europe is much worse than in the U.S. Europe will have a tough time overall. We’ve averted the worst financial crisis in history but have not solved the core issues yet,” Das added.

3. Why the Chinese coup rumours aren't going away - The Globe and Mail's Mark MacKinnon has written a useful explainer on why China's political situation is more volatile than most of the usual suspects in central banks and investment banks think.

The wall of secrecy that Communist Party leadership has built around itself also prevents the development of trust between the government, media and public. It leaves the media with no one to talk to and get real information from when there’s a wild rumour floating about, like the continuing – and so far unfounded – talk that some kind of coup d’état was attempted Monday night in Beijing. And it leaves the public unsure of what to believe in such situations.

The coup rumour began with Chinese bloggers noting some unusual security around the Zhongnanhai leadership compound in the centre of Beijing on Monday night. The speculation grew more excited when some residents reported hearing gunshots in the area.

The whispers gained a wider audience a day later when websites like the Falun Gong-linked Epoch Times (“Coup in Beijing says Chinese Internet rumour mill”) and the Taiwan-based Want China Times (“Shots Fired in Beijing – but what kind?”) quoted unnamed “sources” suggesting a coup attempt had been launched against the government of President Hu Jintao and Premier Wen Jiabao.

The mutiny was supposedly led by a leftist faction inside the Politburo headed by Zhou Yongkang, the chief of China’s massive internal security apparatus, and the recently ousted leadership contender Bo Xilai.

4. Higher death rate - The Guardian reports the death rate in Portugal, which is going through a mass austerity programme, is rising because of health care cuts.

5. Is Madoff a monster or just another thief? - Bernie Madoff's biographer Diana Henriques reveals via Forbes a bunch of emails and letters she exchanged with Madoff in prison when writing his biography.

It seems he's still trying to reconstruct his image...

He remains obsessed about his image. He insists that he was once an honest and successful trader, before unscrupulous clients–people, he says, “I foolishly trusted”–forced him to take on losses, then failed to make him whole on deals gone bad. As a result, he argues, he sank into crime. When did this take place? Madoff is fuzzy about actual details, calling it his “riddle.” It occurred, he says, sometime after the 1987 market crash, but before 1992, when he claims his Ponzi scheme began.

Madoff dishes out a lot of blame, heaping little on himself. He reserves special contempt for feeder-fund managers who invested with him and bankers who handled their accounts: Their over-the-top greed, he suggests, blinded them to obvious signs of fraud–and, therefore, they deserved their fates. Others come off as fools who cannot grasp the basics of a trader’s life–chief among them Irving H. Picard, the bankruptcy trustee trying to track the cash that flowed through his fraud and distribute it to its rightful owners.

If people could only understand him, Madoff seems to be saying, they might not demonize him. He starts an Oct. 11, 2011 e-mail to me this way: “I hope you understand that I am in no way trying to rationalize my terrible behavior.” A ray of conscience? Hardly. Near the end of that e-mail the clouds of self-deception close in again, and Madoff turns himself into a pitiful martyr: “I made the tragic mistake of trying to change the way money was managed and was successful at the start, but lost my way after a while and refused to admit that I failed at one point.”

6. Local Chinese rebellions - The Diplomat has a useful piece on relations between the Chinese central government and various (often rebellious) local governments in China.

The latest clashes are over central government attempts to cool the housing market, which local governments hate because they make much of their money from land sales and ... er... payments from property developers. It is of course very different in New Zealand....

Here's The Diplomat:

In the autumn of 2008, the central government reversed previous policies and ordered banks to reduce mortgage and lending rates to help maintain housing prices. In 2009, restrictive policies were again in place.

Last autumn, the central government issued another set of cooling policies targeting the market. This time, however, it doesn’t appear that the central government will be following the same pattern of loosening for this period of overheating/high real estate prices, despite local government opposition.

Since last autumn, there have been a number of incidents of local government “rebellions” against central government cooling policies.  In October 2011, Nanjing and Anhui Province relaxed local mortgage rules and a city in Guangdong loosed purchase restrictions. In January and February, a southern Chinese city, Zhongshan, increased the price ceiling on residences, and Wuhu, in the east, announced a waiver of the deed tax and the subsidy of some home purchases.

7. 'The beginning of a worrisome trend' - Bloomberg reports on signs that bad loans (Non Performing Loans or NPLs) are rising quickly within China's banking system.

“It’s time to take profits off the table,” said May Yan, a Hong Kong-based analyst at Barclays Capital Inc., who cut her rating on the industry to “neutral” last month, citing weakness in the economy and banking sector. “The rebound of NPLs is not temporary. It’s the beginning of a worrisome trend.”

Non-performing loans at Hong Kong-listed Chinese banks, which include Beijing-based ICBC, China Construction Bank Corp. and Agricultural Bank of China Ltd. (1288), may rise an average 40 percent in 2012, Yan forecast. The bad-loan ratio at the five biggest banks could climb to about 1.9 percent in 2013 from 1.1 percent in 2011, she said.

The economy expanded 8.9 percent last quarter, or at the slowest pace in 2 1/2 years, as Europe’s debt crisis curbed export demand and the property market weakened. The slowdown has extended into this year, with factory output in the first two months rising the least since 2009, while home prices posted the worst performance in a year, data showed this month.

8. Another reason not to do a TPP with America - I've been consistently against New Zealand trying to do a Trans Pacific Partnership 'free' trade deal with America because I think American corporate lobbyists will use it to beat up Pharmac, severely restrict online copyright rights and refuse further entry to our dairy and meat products.

Here's a new angle.

Lori Wallach from Global Trade Watch points out via American Prospect that US financial industry lobbyists want to sneak some changes into the TPP to ensure any rules around New Zealand's financial regulation don't restrict banks and other financial product companies...

I hope the Reserve Bank of New Zealand is watching. And blocking.

Here's the detail:

U.S. trade officials engaged in the TPP are seeking to extend older trade deals’ ban on capital controls, even as Massachusetts Representative Barney Frank, the ranking Democrat on the Financial Services Committee, has demanded a review of whether the past pacts require changes. U.S. negotiators are also pushing for additional limits on domestic financial regulation. These constraints would undermine policies being implemented by many countries to get banks, insurance, and securities firms under control.

This includes a prohibition on bans of risky services and financial products. The provision would enable litigants to challenge purely domestic policies that set limits on financial firms’ size, the types of services a firm may offer, and the legal entity through which a service or product may be provided. This would, for instance, foreclose many policy tools aimed at dealing with “too big to fail” banks and shadow banks, limiting risk via firewalls or requiring derivatives only be sold on exchanges. These would be absolute bans on certain forms of regulation that countries would be forbidden to “adopt or maintain,” not requirements to treat domestic and foreign firms the same.

9. The company hug - Goldman Sachs, where Greg Smith says his money-grubbing colleagues now call clients 'Muppets', was once a much friendlier place where bankers dressed up as Teletubbies.

The New Yorker points to a Goldman Sachs conference from 2000 when a vice president (everyone is a vice president in an American investment bank) called Maynard Holt organised a mass hug to get a mention in the Guinness Book of Records (I kid you not).

Here's what happened, it is reported:

The goal, Holt said, was to bring Goldman representatives together “in a way that says we’re still a small family.”(Around the same time, the massively popular “Big Hug” installments of the BBC children’s series “Teletubbies” were released.) Guinness agreed to the plan and even brought in its own official “hug-invigilator” to oversee the proceedings, which transpired as the second day of the Goldman conference drew to a close:

The investment bankers went to work. Four young ones, who had been ordered to put on Teletubby costumes, emerged from the wings and began roaming the tables, to put their colleagues in a huggable mood. Twenty others, “hug police” wearing construction helmets with head lamps, and T-shirts over their ties, fanned out with clipboards to round up recruits. Partner or peon, it didn’t matter. The big hug was for everyone. Those who signed up were given yellow stickers, which read “One Team, One Hug,” and were told to line up along the wall, where they began to form a circle around the ballroom.

10. Totally Stephen Colbert on the Greg Smith 'Muppets' op-ed in the New York Times.

"Unfortunately, Ernie took a real bath."

 

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15 Comments

@#1 Forcing State Pension

@#1
Forcing State Pension funds to purchased 100 year bonds is worse the eroding real value it’s the very definition of #monetization.

I was just thinking that the

I was just thinking that the next gimmik has to be extending maturities.  This actually makes the debt worthless.  Especially when you are issuing new ones to pay the interest on the old ones.  Who said debt had limits?

Debt doesn’t have limits…but

Debt doesn’t have limits…but people do.

All real things have limits,

All real things have limits, debt is an unreal imaginary thing.  If something is the sum of its parts, and debt came from nothing......
 
The road just got much, much longer.

Debt is the mathematical

Debt is the mathematical equivalent of taking the square root of -1. It’s a useful tool but it really has no meaning outside its own context.
Short anyone that holds that 100 year paper!!

What happened to the large

What happened to the large chunk of debt Greece was going to have to pay back on 20th March?  Wasn't this the big one where they were going to default?  I haven't seen anything on the Net regarding it. ... Oh just checked again and it seems they managed to pay it off ...
http://www.neurope.eu/article/new-loan-agreement-reshuffles-greek-political-scenery
"On 19 March, Athens received the first instalment of the new loans and repaid a huge bond that expired on 20 March of €14.4bn.
The bond received a 'haircut' of 53.5% off its nominal value – in return, the holders of this debt paper received 31.5% of its nominal value in new Greek bonds of long maturities of up to 30 years, plus 15% in easily tradable short debt paper issued by the European Financial Stability Facility (EFSF), of two or three-year maturities."

#1 'This is where central

#1 'This is where central banks and governments force long term and short term interest rates lower than the inflation rate.'
The above assumes a fiscal balance...which is not the case btw. If the fiscal deficit as a % of government income is greater than inflation - real debt is still rising so you can't inflate your debts away... why do people who refer to financial regression always leave this out of their assumptions...???
The inflation rate has to run ahead of both the interest rate and the deficit as a % of government income combined for this to have any hope of even working...
 

Forget China - now this is a

Forget China - now this is a hard landing. Because what's $20 million in taxpayer funded equipment between soldiers: LTRO 1+2 alone were like 650 of these...
Hard Landing - Caption This Apache Helicopter Crash... In The Middle Of Afghanistan

Government is the waste

Government is the waste machine.  Even better when we work (or pretend to) all day, so we can give them ours to waste.  I have found that the shortest definition of evil is:  waste.
I'm sure they can even spin the waste in a positive way though, or waste more paying an overpriced spin doctor.

http://www.humanbirdwings.net

http://www.humanbirdwings.net/
 
No further explanation required

A look at the Bakken shale

A look at the Bakken shale oil field -
http://energybulletin.net/stories/2012-03-21/peak-oil-crisis-parsing-bakken
Rapidly diminishing returns, low EROEI etc.

Eurozone - meet Mr Recession

Eurozone - meet Mr Recession (again):
http://www.finfacts.ie/irishfinancenews/article_1024098.shtml
 
That will be the oil price doing its funky little thing (again).

Im lost on no8, why dont we

Im lost on no8, why dont we just walk away?
To me if Imlooking at  a deal and it doesnt look very good and I know the other side is a dodgy bugger then I walk out the door.....I stand more to lose by signing........like duh.
 
regards

AUSTRALIAN HOUSING

AUSTRALIAN HOUSING MARKET
Leith van Onselen reports on an excellent articlr by David Uren in MacroBusiness......a couple of days back.....Well worth a read -
http://www.macrobusiness.com.au/2012/03/uren-turns-bearish-on-australian-property-by-leith-van-onselen/