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Wednesday's Top 10 with NZ Mint: Modern Monetary Theory's 'guaranteed job' goes mainstream at CNBC; Chinese pawn brokers doubling property lending every two years; Europe's zombie banks;
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 to firstname.lastname@example.org.
I'll pop the extras into the comment stream. See all previous Top 10s here.
My must read today is #1. Some curious ideas are bubbling up from the economic nether regions.
1. A job for everyone - Modern Monetary Theory (MMT) is increasingly intruding into the mainstream as frustration grows with the inability of conventional neo-classical economic theory to turn around the Great Recession.
Here's CNBC's John Carney pointing to one MMT plan where government becomes the employer of last resort (ELR) offering a job guarantee (JG).
Carney points to the risks of crowding out of jobs and activity in the private sector, along with wage inflation not connected productivity.
However, he says, it shouldn't be written off as an idea.
It's fascinating to see MMT ideas progressing to the mainstream now. CNBC is hardly a left wing bastion. Carney suggests a tax credit for domestic workers.
These objections, and many others, have led many to conclude that the Job Guarantee/Employer of Last Resort is unworkable. This is unfortunate, because many of the ideas behind the JG are worthy of serious consideration. Unemployment is socially and economically destructive for individuals and society. It leads to a host of social pathologies and the unused labor means that we’re not, as a country, being all we can be.
Fortunately, there is a type of JG that overcomes many of these problems. It is non-bureaucratic, does not make the government the employer of last resort, does not require capital equipment, and does not interfere (very much) with existing private or public job functions. What’s more, it is very affordable under existing economic arrangements.
The idea is simple: a federal income tax-credit for households that hire domestic-service workers.
2. IMF forecasts a near doubling of oil prices - One the reasons economic growth just won't get going again is the persistently high price of oil. Now the IMF points out a doubling of prices is likely over the next decade
The model performs far better than existing empirical models in forecasting oil prices and oil output out of sample. Its point forecast is for a near doubling of the real price of oil over the coming decade.
Economic logic says to invest in and economize on the limiting factor. Economic logic has not changed; what has changed is the limiting factor. It is now natural resources, not capital, that we must economize on and invest in. Economists have not recognized this fundamental shift in the pattern of scarcity.
Nobel Laureate in chemistry and underground economist, Frederick Soddy, predicted the shift eighty years ago. He argued that mankind ultimately lives on current sunshine, captured with the aid of plants, soil, and water. This fundamental permanent basis for life is temporarily supplemented by the release of trapped sunshine of Paleozoic summers that is being rapidly depleted to fuel what he called “the flamboyant age.” So addicted are we to this short-run subsidy that our technocrats advocate shutting out some of the incoming solar energy to make more thermal room for burning fossil fuels!
Economists used to believe that capital was the limiting factor. Therefore they implicitly must have believed in complementarity between capital and natural resources back in the empty-world economy. But when resources became limiting in the new full-world economy, rather than recognizing the shift in the pattern of scarcity and the new limiting factor, they abandoned the whole idea of limiting factor by emphasizing substitutability to the exclusion of complementarity. The new reason for emphasizing capital over natural resources is the claim that capital is a near perfect substitute for resources.
4. Pawn brokers for houses in China - FT.com has a useful piece here on the growth of pawn shops into bank-like institutions in China. One chain of such shops now has 60% of its loans backed by property and 30% by cars. Sound familiar?
This is not going to end well.
Throughout China, pawnshops have branched out a long way from their roots of swapping relatively small loans for collateral such as jewellery. They have become key players in an important corner of the country’s economy as lenders of last resort to small businesses, an activity where stakes are much higher.
Small businesses, which struggle to get loans anywhere in the world, are particularly disadvantaged in China where state-owned banks shy away from private companies. The transformation of pawnshops into quasi-banks offers a glimpse into the shortcomings of the Chinese financial system, but also the ways in which entrepreneurs are coming up with solutions.
Some of Europe's biggest banks are increasingly hoarding their cash at central banks, anxious the continent's crisis could intensify and leave them with bigger problems.
At the end of March, 10 of Europe's biggest banks had parked a total of nearly $1.2 trillion of cash at central banks around the world, according to an analysis by The Wall Street Journal of bank disclosures. The total is $128 billion higher, or a 12% jump, since December and up 66% from the end of 2010.
After a three-month thaw earlier this year, bank-funding markets are showing signs of another freeze. European banks that deposit their money at central banks rather than lend it to customers or use it for other purposes are ensuring they have ready access to funds if they encounter trouble refinancing their debts or if other emergencies prompt customers to withdraw large amounts of money, such as credit-rating downgrades.
The Germans won't like it.
Lagarde’s call to repurpose the agreed-upon European bailout mechanisms to provide for more direct aid to banks is reminiscent of the moves made by the U.S. Treasury in 2008 under then-Secretary Hank Paulson. After winning approval from Congress for the $700 billion Troubled Asset Relief program, the Treasury Department opted to use the funds for direct capital injections into banks, in return for interests that could convert to equity stakes, rather than the initial plan of purchasing toxic assets off firms’ balance sheets.
How big are those liabilities? Take your pick. But my back-of-the-envelope calculations aren’t too far from Jagadeesh Gokhale’s, who reckons total unfunded health and pension obligations to be around 400% of GDP in the EU. That’s a lot of pressure yet to come onto eurozone government balance sheets and with it, presumably, plenty of economic pain to fuel anti- immigration and anti-euro ideologies.
Caterpillar missed first-quarter revenue estimates as China sales plunged. Q1 sales in that country fell by $250 million to $300 million. Although China has adversely affected a number of first-quarter earnings statements, there is a near-universal belief that its economic problems are temporary. Siemens sees a pickup in growth in the second half of this year, for instance.
Yet these assessments appear overly optimistic. Corporate performance—at Caterpillar and elsewhere—suggests that the slowdown in China is broad based, and it may even be deeper than generally acknowledged. “When I talk to companies throughout China, there isn’t a single one that I’ve talked to that is looking at an increase in revenues or an increase in profits this year,” says Tsinghua University’s Patrick Chovanec. In fact, he even believes that, based on company performance, the Chinese economy may even be “experiencing a contraction” at the moment.
So, despite what corporate forecasts in the U.S. indicate, the problems in the Chinese economy are widespread and perhaps even systemic. From many indications, the economy has already passed an inflection point and started a decades-long decline.
9. Less dependence on the US$ - One of the reasons the US dollar is the global reserve currency is it is the main currency used to trade oil.
Now Iran is going to use China's renminbi to sell oil, Reuters reports.
American sanctions may backfire.