Tuesday's Top 10 with NZ Mint: Australia's 'Dog Days' are coming; China's pensions black hole; The Global Doomsday machine is still running; Sudden Wealth Syndrome; Dilbert

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

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read chart is #4 on China's ageing population and looming pensions hole. Its workforce starts contracting from 2015... #8 is my second most-read.

1. 'Dog Days' for Australia - AFR.com reports on prominent economist Ross Garnault's warning to Australians they face 'dog days' of falling incomes and living standards because of the economic growth slowdown in China.

This is something we need to think about here in New Zealand too.

New Zealand dodged a bullet in 2008/09 because of China's extraordinary burst of infrastructure investment in response to the Lehman crisis.

All that investment in roads, rail, bridges, apartments and airports sucked in mountains of Australian iron ore and coal to make the steel for all that building..

China's domestic economy also perked up. So our biggest and second biggest buyer of exports skipped through the Global Financial Crisis, supporting us.

Now as Europe is slowing, so is China and Australia.

We may not skip through so easily this time around. Our 'exit' valve of Australia's job market is also likely to close up.

Here's Garnault:

Professor Garnaut, who forecast the rise of China in 1989, said the “salad days” of the boom were rapidly becoming “dog days” of faltering incomes and living standards in Australia.

He cited an urgent need for Australians to make “shared sacrifices,” such as in 1983 when the Hawke government slashed spending and introduced the wages accord. He also suggested the easy money tax breaks for the well-off and elderly should end.

“We do have to recognise that we’re in for fairly tough times,” the University of Melbourne professor told The Australian Financial Review in an interview yesterday.

2. But why? - Garnault explains well here why China is not going to repeat that amazing post-Lehman boom in infrastructure spending.

He said Australia’s terms of trade, or income from exports, would be hit by three “mutually reinforcing negatives” under way in China.

The first was a shift in China’s economy away from a focus on heavy industrial investment and exports, which have driven metals and energy demand. The second was a wave of internal reforms including the move towards lower carbon emissions that would cruel demand for Australian thermal coal. The third was the current “cyclical” downturn that was likely to continue.

“It’s an accident they’re coming all at once, but they are,” Professor Garnaut said, adding that China’s leaders showed no signs of wanting to repeat the post-GFC stimulus boost that helped turbocharge Australia’s terms of trade from 2009 to 2011.

3. Just add debt - China's local governments can't borow from banks anymore so they're issuing bonds through off balance sheet vehicles called Local Government Financing Vehicles (LGFV). 

Reuters reports these LGFV bond issues are rising fast.

While investors scrutinize China's monthly bank lending figures for signs of economic stimulus, a closer look at the data shows bonds are gradually replacing bank loans as the key source of funding for stimulus-style investment projects, especially for local governments.

 

New medium- and long-term (MLT) bonds have exceeded similar term loans for corporate credit three times over the last 10 months -- most recently in August -- a pattern that had never occurred prior to November last year.

 

That bond funding, much of which has flowed to local governments, marks an enormous shift for a financial system traditionally dominated by bank lending. But further accumulation of debt by local governments raises longer-term risks for the economy, as many localities carry massive debt loads racked up during China's vast 2008/09 stimulus.

4. China sliding into a pensions black hole - Here's the Reuters analysis explaining the demographic challenges in China.

Policy makers and economists have long been worried about the financial burden of China's expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years.

The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion in the next 20 years from $2.6 trillion in 2010, towering over China's $3 trillion onshore savings, the biggest hoard of domestic savings in the world.

Time is not on China's side. Its fast-maturing society and economy -- thanks to a one-child policy and a rapid rise in living standards -- demand better pension coverage in future.

The problem of growing old, fast, is most acute in the countryside, where thousands of villages are "hollowed out" as working adults abandon farms to migrate to cities in search of better lives, leaving the young and old behind.

The old-age dependency ratio, or the number of elderly people as a share of those of working age, will hit 34.4 percent in rural China by 2030, compared to 21.1 percent in urban areas, and up from 13.5 percent in 2008, the World Bank said.

5. What the Fiscal Cliff looks like - Reuters reports on what the US Fiscal Cliff actually looks like. I still can't believe the US political won't find some last-minute fudge to stop this happening, but you never know...

If Congress does nothing and the United States plunges off the "fiscal cliff" in three months, taxes would rise for 90 percent of Americans due to automatic increases in income and payroll taxes and other financial shocks, said a report issued on Monday.

In the latest forecast of trouble ahead if Capitol Hill cannot overcome its fiscal paralysis, the Tax Policy Center, a Washington think tank, predicted taxes would rise by $500 billion in 2013, or an average of almost $3,500 per household.

At the same time, government spending would shrink, reducing the budget deficit. But the economy would likely be thrown back into recession next year, the center said, echoing similar predictions of the devastating impact of going off the "cliff."

6. What are they thinking? - Bloomberg reports Iceland is preparing to join the Euro-zone... They don't even have any good golfers.

7. A race against time - Hugo Dixon at Reuters has a nice summary of the problems facing the euro-zone.

Solving the euro crisis is a race against time. Can peripheral economies reform before the people buckle under the pressure of austerity and pull the rug from their politicians? After two months of optimism triggered by the European Central Bank’s plans to buy government bonds, investors got a touch of jitters last week.

The question is whether Madrid and other governments in Lisbon, Dublin, Rome and Athens can keep up the reforms long enough to restore their economies to health. That, in turn, depends on three factors: how much farther they have to travel; how unruly their people are going to get; and how much help they will receive from their partners.

Economic health requires both that fiscal deficits are eliminated and that competitiveness is restored. The peripheral economies have made some progress on both fronts. But shrinking economies makes it hard to balance their budgets while fiscal squeezes undermine growth. The vicious spiral of austerity is still whirring away.

8. The Doomsday Cycle - MIT Professor Simon Johnson and LSE Associate Peter Boone write at VoxEu about the Doomsday machine that is the modern global financial system.

The tragedy of the Eurozone appears unavoidable, but it reflects far greater risks that will spread to Japan, the US, and other advanced economies.
Through our financial systems, we have created enormous, complex financial structures that can inflict tragic consequences with failure and yet are inherently difficult to regulate and control. We are at the behest of our politicians and financial sectors to prevent them from creating dangers. Yet around the world, our political and financial systems have aligned to build these dangers rather than suppress them.

The continuing crisis in the Eurozone merely buys times for Japan and the US. Investors are seeking refuge in these two countries only because the dangers are most imminent in the Eurozone. Will these countries take this time to fix their underlying fiscal and financial problems? That seems unlikely.

The lesson from all these troubles is clear: the relatively recent rise of the institutions of complex financial markets, around the world, has permitted the growth of large, unsustainable finance. We rely on our political systems to check these dangers, but instead the politicians naturally develop symbiotic relationships that encourage irresponsible growth.

The nature of ‘irresponsible growth’ is different in each country and region – but it is similarly unsustainable and it is still growing. There are more crises to come and they are likely to be worse than the last one.

9. How high oil prices will permanently cap economic gap - Here's Jeff Rubin at Bloomberg with an opinion piece to warm the hearts of PDK and others.

For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.

The countries guzzling the most oil are taking the biggest hits to potential economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global economic growth; the federal government was running budget surpluses; the jobless rate at the beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1 trillion and almost 13 million Americans are unemployed.

And the U.S. isn’t the only country getting squeezed. From Europe to Japan, governments are struggling to restore growth. But the economic remedies being used are doing more harm than good, based as they are on a fundamental belief that economic growth can return to its former strength. Central bankers and policy makers have failed to fully recognize the suffocating impact of $100-a-barrel oil.

10. Totally The Daily Show on contracting Sudden Wealth Syndrome (SWS).

I wish.

"The wealthy are people too."