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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;

Posted in Opinion

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 bernard.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. 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.

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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.

Here's Carney:

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.

3. Maybe sunshine is the limiting factor - Herman Daly writes here about Frederick Snoddy's theories on the limiting factor for economies

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.

5. European banks hoarding their cash - Here's Wall St Journal with what's really going on inside Europe's zombiefied banking system

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.

6. Let the ECB bail out banks directly - Here's what the IMF's Christine Largarde is saying via Forbes

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.

7. Unfunded pension liabilities in Europe - Societe Generale's Dylan Grice points out in this research note that Europe's governments have grotesque unfunded liabilities due to ageing and slow growth

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.

8. China crushes Caterpillar - Forbes' Gordon Chang reports on how the slide in China's construction sector is hitting companies and people on the ground in China

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.

10. Totally Jon Stewart on the latest European crisis.

 

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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44 Comments

1 - ignores 3. 2 - ignores

1 - ignores 3.
2 - ignores 3.
8 - is a result of 3.
9 - is why we will see USA invade Iran.
 
You read the 'negative pigs' bit from Soddy, BH?
 
Had it totally nailed in 1926.

Au Contraire....PDK on 9 -

Au Contraire....PDK on 9 -  Israel will take the lead on IRAN...if Barry gets returned the U.S. does not want troops on the ground in IRAN..... without Israel being attacked first....I fully expect Israel's level of provocation to increase post their elections... or non election as the case may behttp://www.bbc.co.uk/news/world-middle-east-17986071
If Mitt the Mutt gets in ...God / Allah help us all....Netanyahu doesn't think Barry's a committed player. 

I agree, As the US empire

I agree, As the US empire loses its grip what is going to stop Israel? Its a positive feedback situation, the less power the US has/exhibits the more likely its Yiddish dog will slip off the leash which will in turn damage the US. They are in a losing spiral

Not sure the 3 negates the

Not sure the 3 negates the theory of 1, This is more about how do you manage the statistical tips at the low end of the range, though I think we would be better served by managing the sociopaths at the other end of the curve

Interesting, the eariliest

Interesting, the eariliest piece I had read was in the 1950s talking about such as this....and here we go back to the 1920s....
wow....the only Q is he thought and said it, how many others thought or heard and said nothing......back then we had 2billion? and our planet can support about 2 billion.....If he had been listened to then.......
regards

http://www.energybulletin.net

http://www.energybulletin.net/stories/2012-04-09/capital-debt-and-alchemy
 
Soddy gave a simple example. Minus two pigs (debt) is a mathematical quantity having no physical existence, and the population of negative pigs can grow without limit. Plus two pigs (wealth) is a physical quantity, and their population growth is limited by the need to feed the pigs, dispose of their waste, find space for them, etc. Both may grow at a given x% for a while, but before long the population of negative pigs will greatly outnumber that of the positive pigs, because the population of positive pigs is limited by the physical constraints of a finite and entropic world. The value of a negative pig will fall to a small fraction of the value of a positive pig. Owners of negative pigs will be greatly disappointed and angered when they try to exchange them for positive pigs. In today’s terms, instead of negative pigs, think “unfunded pension liabilities” or “sub-prime mortgages.”

Oh yes I agree....what hacks

Oh yes I agree....what hacks me off is im locked into several pension funds and can do little if anything....they simply pay out at 65.....yeah right.......thats why I think kiwisaver is such a crock of doo doo.....its not going to pay back and I'll bet that before that the Govn empties it anyway writing IOUs as it goes aka Bushie....clearing debt is far more sane right now.
regards
 

MMT explicitly says that

MMT explicitly says that governments are resource constrained, not currency constrained. It's the only economic theory that is pays adequate attention to 1.

Well its then very simple to

Well its then very simple to show MMT uis crap....money is a proxy or IOU for energy which is your resource....so if you have only 1 unit of energy thats it.....whether you have 1 unit of money or 10 or 100 you can only buy 1 unit of energy....ie you are resource constrained....
Hence its a crook of doo doo and one huge scam....believed in by the lazy and gullible.
regards

More analysis on that IMF

More analysis on that IMF report on oil:
http://ourfiniteworld.com/

It would be interesting to

It would be interesting to know how much inflation of goods/food we would have should the price double over this coming decade. I imagine the cost of living will be getting a whole lot higher in the not too distant future.

Actually the reverse, our

Actually the reverse, our economy cant survive oil past $140 let alone $200 that the IMF thinks will happen...priced in todays terms that is.....eg in 2008 it was $147 allowing for inflation that is $159 today.....Severe deflation is on the cards and if you have $s then you will be OK, the problem will be hanging onto them as banks could well default....
In terms of affordability the thought is that wages will also fall after oil is down to say $30USD....so food etc will fall in value but wages faster so yes will be a bigger part or % of your costs as you earn less....
regards

It is pedantic, I give you

It is pedantic, I give you that, but:
IF the logical premise is that we don't survive past $140
THEN if oil was $147 a barrel.
AND we are still here to argue the point.
THEN the premise was bollocks.
Perhaps a better premise would be $150 a barrel, although (logically speaking) there is nothing to support the premise.
 
Mind you, in my defence, logic is by nature pendantic.

huh? by survive I mean a

huh? by survive I mean a healthy growing economy....not survival as a species?....though I recall reading of ppl starving to death in that period. There is a train or school of thought that says oil at $147 (which is about 6% of the US GDP triggered a recession...we got to $120 ish and that was suggested was the new limit due the economy being weakened. It certianly looks like that is probable right now.
Sure the economy didnt collapse to zero or say 10%....but it took a severe step back, approaching the Great Depression in scale and depth, but it isnt over yet.
regards

Steven I thought the report

Steven
I thought the report was flawed in that it saw GDP growth and higher oil prices, though I also think your predictions are flawed in the same way that most of the mainstream peak oilers are. Firstly they look at everything from a US perspective, and lets face it they are gross glutons so a long decline in their resource usage is going to happen and long overdue but those inside the system see this as a catastophe, secondly because the US is so corpulent it has a great capacity to shrink. This is where the western and esp. US histrionics is flawed, the universe does not revolve around their big asses
Neven
 

So the MMT idea is that

So the MMT idea is that Government (TAX PAYERS) should guarantee the job of the workers (TAX PAYERS).
 
Why don't all these tax payers simply stay home and write themselves a cheque for a million dollars and live it up?

WRONG. The aim of fiscal

WRONG.
The aim of fiscal policy should be to generate full employment and ensure that nominal spending growth stays within the real capacity of the economy to absorb it without inflation.

Wrong as in you don't believe

Wrong as in you don't believe government is financed by tax payers or wrong in the sense you don't think workers pay tax?
 
The scheme of staying at home and writing our own cheques does have the benefit of cutting out the government middle man.

The fact is that a sovereign

The fact is that a sovereign government (like NZ) is NOT finaced by taxes.  It must first create and spend the NZ$ and then it collects tax to create a demand for the currency.  It (NZ govt) is not finacially constrained by tax revenue. It can use fiscal policy as required to acheive the highest possible levels of employment by using idle resources the private sector is unable or unwilling to employ.
Don't understand your second paragraph/sentence.

pure voodoo....congrats you

pure voodoo....congrats you beat GBH for gullible and stupidity....laughable that you think a Govn can simply use resources at its whim...and do it well......utter, uttter rubbish.
regards

Short of citing the ability

Short of citing the ability of the virtually any government to muster a required military might at a whim, many governments have used idle peacetime resources effectively: Roosevelt's New Deal, Australia's public works programs after WWII.  The point is: it's better to have the unused resources employed for the public good than sitting around collecting dole cheques.
Try attacking the argument, rather than the person, next time.

No you are wrong, full

No you are wrong, full employemnt via fiscal policy has been tried and the results were a disaster. UK, Labour Govn 1970s....
The theory doesnt even stand up to simply scrutiny, you cant get full employment....at some point and that seems to be at best 3%~5% you get a mismatch between the skills wanted and the skills the remaining un-employed have.....by then some areas are severly over-heating in terms of wage growth like say IT....others will be left behind...as inflation takes off...
regards

NZ was never more productive

NZ was never more productive between the 50s-70s when we had the closest thing to full employment anyone could ask for.
It was only crooked ideology & the aftershocks of Nixon's decision to scrap the gold standard in '71 which has cast us adrift.

Nixon was being called out by

Nixon was being called out by the French who were emptying the US of gold....50s and 70s were the days of plenty, sure.....many of my parents generation did pretty well, cheap and abundant oil and resources to plunder without thought for future generations.....then of course it started to go wrong.....
regards

exactly....its pure

exactly....its pure voodoo......The UK Labour Govn in the 70s tried a similar thing and it failed and badly....its seems every so many years its like fashion the same old crap gets trundled out as a new idea.....
regards

Bad Governments will wreck

Bad Governments will wreck any economy if they want to.

True....bad economic theory

True....bad economic theory will do it even quicker.
regards

Actually, MMT is what we

Actually, MMT is what we effectively have now and it has prevented a 30's style depression through the GFC.  So in that sense, I'd say that this economoic theory is doing us good.

Tell you what  I'll write you

Tell you what  I'll write you a cheque on his bank account and you write me one on his....lets see who squeals first...
;]
regards

1.  Not so sure about this

1.  Not so sure about this idea to get Jobs Growth in the US:
The idea is simple: a federal income tax-credit for households that hire domestic-service workers.
They already hire illegal aliens (yes, that's what they call them) who do this home and garden (domestic) work in their droves and -
- you don't have to pay a minimum wage
- for both ends of the transaction it is a cash (undeclared) payment
- you can transact other undeclared 'business' with your housekeeper/gardener
 
 

#3 Oil price With these

#3 Oil price
With these constant predictions, you have to wonder at the NZ govt's blindness.
Why to we have one of the lowest tax rates for petrol in the OECD, thus encouraging hi fuel usage?
Why do we have the same rego for a Daihatsu Charade as for a 6 litre SUV, thus encouraging hi fuel usage?
Why do we have no fuel efficiency requirements for cars, thus encouraging hi fuel usage?
D'oooh!  When the s*** hits the fan, we are going to be horrifically unprepared.
It amazes me that there is zero political dialogue on this issue
Cheers

because voters would get

because voters would get p*ssed and not vote for them....as someone said the only difference between National and Labour is the L and the N.  Even the Green's wont mention it ie campaign......they know full well the resulting fear and rejection ie  loss of votes that would cause.
They have had enough reports...and docs and warnings....BE etc even hints or says such accidently.....but its a confidence game and the second they say something is seriously wrong its bye bye economy and tax income....
So for National its simple, its FEAR....so they like the last lot(s) can kick. 
PDK I think has said before that senior? Labour cant believe it .....then everything is bye bye..
Matt Simmons said that he thought it would take 3 such events as this to get the reality through, this is half way through the second one.....so we have a few years of living with the fairies yet.....
regards

Philly : As Tribeless would

Philly : As Tribeless would tell you , why wait around for government to direct your behaviour , when your own in-built commonsense tells you what action to take .....
 
....... the Gummster clan have always foresaken  " style " and " opulence " in our choice of motor vehicles , and chosen fuel efficiency , reliability & nimbleness ....
 
If the " s*** hits the fan " , as you so eloquently put it , we will already be attuned to efficient fuel useage ...... it won't be something new , a burden , for us .

Sorry, #2!  Not #3.

Sorry, #2!  Not #3.

#7 Unfunded pension

#7 Unfunded pension liabilities in Europe
Good thing we live in Godzone where John has assured us we don't have to worry our little heads about that sort of thing.  Keep the pension age at 65 & she'll all be sweet.
Nothing to see here, move along!
 

Amen #3   I've been telling

Amen #3
 
I've been telling people this for a while now, with one exception - I identified the choke point in the world economy at the moment as the lack of end point consumer demand (read: ability to pay) rather than resources. 
 
Thoughts? The way I see it, right just now we are not running up against a resource limit - but the inability of the masses to buy pool tables and hot tubs (and thereby stimulate the economy etc etc) does seem to be causing everthing to come crashing down. 
 
'Course if the oil price does double, that'd be a pretty good indicator of a resource crisis. 

As in today?  given the

As in today?  given the historic price of oil was in the <$40 range and we have just seen 3 times that and close to 4 times that in 2008 then its way past double. Let alone the output graphs which are easy to read....
I would argue that in fact the price of oil has taken away the ability of ppl to pay and the knock effect is what we see.....and we will see it again and again....a downward saw tooth effect....
I dont think oil will ever get to $200 as a trend, I think the World's economy collapses long before then.....mind you if the US does a stupid on Iran, yeah $200 odd overnight....then a global crash and rationing....those in NZ using a tank full+ a week wont be....
regards

P.S     oil price is heading

P.S     oil price is heading down at present,supply and demand and all that. Nothing to get too worked up about

Indeed.....so the oil

Indeed.....so the oil speculators are I assume starting to exit as Greece looks to exit....
Demand drops as ppl can no longer afford to buy......that might indicate what happens next....
regards

That is a bare faced lie! We

That is a bare faced lie! We all know that the price of oil cannot come down as it is on the upside of the downside of the backwards facing upslope of the poultry curve which means there isn't any of it left. And that means the price can only go one way and that's up. Anything else is spin, pure lies, damn lies, delusions, denials and the desperate ravings of people who won't cope with eating delicious lentils and living in lovingly hand crafted poop-a-huts.
 
It's not subject to argument. You can't argue with the flatulence! 

You know I used to think you

You know I used to think you were probably just slow and blinkered, now Im convinced you are.
regards

Wow Steven, you are so much

Wow Steven, you are so much smarter than all of us. I feel so lucky being able to read your 4,000 posts a day about peak everything. I'm wondering if you have the same commitment with your physical, as well as written, masturbatory efforts? I bet you're a prolific masturbator.

LOL..... Oh dear....well tell

LOL.....
Oh dear....well tell you what, start writing posts that stand up to scrutiny, ie have logic, data, science and maths behind them, this is what I try to do...because many posts Im seeing are politically biased rubbish....that lack all of the above......
So yeah you might want to fly like Superman because you know its just right and you deserve it, but you cant get someone to cancel gravity for you by dictating it......doesnt work....
regards

The cost of extracting oil

The cost of extracting oil from the ground is continually increasing.  When people cannot afford to pay that, the price will not drop below the cost of extraction, instead production will stop.  There's something to ponder.