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Thursday's Top 10 with NZ Mint: NZX strategist calls for 10% flat tax in ChCh; Martin Wolf argues against fiscal austerity; Why central banks should sacrifice independence; Dilbert
Here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.
As always, we welcome your additions in the comments below or via email to email@example.com.
My must read today is #1 from Ambrose on central bank independence.
This is one of the central questions to emerge from the Global Financial Crisis.
As democratically-elected governments become increasingly bogged down in fiscal policy debates that falsely compare household and government debts, someone has to be the grownup to boost the economy.
Central banks have cut rates as much as possible and the more enlightened/desperate ones are now monetising government debt to keep the boat afloat.
That often requires central banks to effectively give up their independence.
I think we'll eventually see that here too after an almighty fight between a centre-left government and the current Reserve Bank Governor.
Princeton professor Gauti Eggertsson has long argued that independent central banks have a “deflation bias” by their nature. This was fine during the quarter century after the Great Inflation of the 1970s, but as the inflation rate fell ever lower with each business cycle it eventually became dangerous, for there lies the dreaded “liquidity trap”.
A new paper by Paul McCulley and Zoltan Poszar argues that the taste for independent central banks goes “hand-in-hand with secular private debt cycles”. It becomes faddish during credit upswings such as the era of “monetary supremacy” from 1978 to 2008. The appeal wears off as the “deleveraging cycle” gathers force and the economy slides into slump.
2. The problem with the strong euro - The FT points out the recent euro strength is causing problems for the European economy, which has plenty of problems already.
The FT wonders if the ECB will eventually have to get off the sidelines and return fire in the currency wars -- ie by fully monetising government debt (printing money)
Even Germany’s resilient exporters have reason to worry – the euro/yen rate matters for the country’s powerful car manufacturers. Jean-Claude Juncker, Luxembourg’s prime minister, who has just relinquished his chairmanship of eurozone finance ministers meetings, warned last week that the euro’s level was “dangerously high”.
All of which means Mr Draghi needs a contingency plan up his sleeve. A first step could be Trichet-style “open mouth operations”. But the ECB could go further and offer more long-term liquidity, for instance, or lower interest rates further.
3. Flat tax in Christchurch? - NZX Head of Strategy Sam Stanley has called for a flat tax of 10% in Christchurch on TV3's Firstline. Your thoughts in the comments below please.
"I'd like to see them look at Canterbury… it would be great to see them bring in a low flat tax of say, 10 percent, within the Christhchurch, Canterbury area to encourage new businesses," Sam Stanley of the NZX told Firstline this morning.
"Ring-fence that Christchurch area and see if they can encourage new businesses to come in and activity to be fuelled out of the Christchurch zone.
4. 'Just calm down people' - Martin Wolf at FT.com makes a persuasive case against fiscal austerity when economies are flatlining, in particular in the United States.
Yet another legacy of the crisis has been a huge rise in the consolidated financial surplus of the private sector (balance between income and spending, as shares of GDP). The fiscal deficit is the mirror image of this increased private prudence. The risk is that accelerated fiscal stringency, at a time of zero interest rates, will depress the economy more than improve the fiscal outcomes. This is because fiscal multipliers are particularly high in such circumstances, as the International Monetary Fund has argued. The time to tighten fiscal policy will be when the economy is strong.
The federal government is not on the verge of bankruptcy. If anything, the tightening has been too much and too fast. The fiscal position is also not the most urgent economic challenge. It is far more important to promote recovery. The challenges in the longer term are to raise revenue while curbing the cost of health. Meanwhile, people, just calm down.
5. Heretical thoughts from Chalkie - Fairfax Media's business columnist Chalkie has picked up on last year's deeply heretical Chicago Revisited paper from the IMF that suggested a complete change in the current system of fractional reserve lending and privately created money - ie making sure all bank deposits are backed by government bonds.
The Kumhof/Benes paper proposes requiring bank deposits to be 100 per cent backed by reserves of government-issued money, which banks borrow from the state Treasury. This immediately reduces the risk of a bank run to zero.
Previous bank lending to the government can be netted off against this borrowing, resulting in a huge reduction in government debt.
The old lending function of banks is meanwhile carried out by investment trusts that must fund their loans with money borrowed from the Treasury, or with existing government-issued money borrowed from the private sector, or with their own equity. Chalkie has necessarily over-simplified the scheme, but it is clearly a radical departure from the way the money supply is handled today.
6. A new gold standard? - So wonders Ambrose in another of his pieces at The Telegraph pointing to central bank gold purchases. The Bundesbank's decision to move its gold back from America to Germany is interesting too.
Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.
The central bank buyers are of course the rising powers of Asia and the commodity bloc, now holders of two thirds of the world’s $11 trillion foreign reserves, and all its incremental reserves.
It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America. And now the Bundesbank has chosen to pull part of its gold from New York and Paris.
7. 'Cowardly politicians and the grey vote' - Mary Riddell writes at The Telegraph about cowardly politicians who kowtow to grey voters at the expense of younger generations. Sound familiar?
Horror over the fate of poorer pensioners has for too long been mixed with misplaced sentimentality over all older people. The whiff of a granny tax is enough to reduce the political classes to apoplexy – and yet the over-55s, the most privileged generation ever, own two-thirds of the UK’s housing wealth. The difficulty, for Labour and Tories alike, is that the same cohort accounts for 40 per cent of general election votes.
Too bad. Fear of the grey vote is closing off the few remaining ways of fairly redistributing resources and wealth to help poorer pensioners and hard-pressed parents alike. Generation Xploited – younger people struggling to get by – is stretched to its limits. It cannot, and will not, pick up the bill for the political cowardice afflicting those barely out of the cradle and those condemned to misery as they approach the grave.
9. How's China's elite are unmasked - Further to yesterday's piece about corrupt Chinese officials fleeing China and buying offshore property, this is a cracking story of a Chinese banking official who owned 20 properties in Beijing because she created a fake hukou ID card (a very sensitive topic in China).
Police are investigating a former bank executive who was accused of holding four hukou, or household registrations, that she used to buy many properties.
Gong Aiai, 49, a former deputy chief of Shenmu Rural Commercial Bank, was exposed in an online post on Jan 17 that said she used two identity cards, one of them fake, to buy expensive properties. Identity cards are issued on the basis of hukou. News media have reported that she owns more than 20 properties in Beijing, worth 1 billion yuan ($160 million).
(Updated with fixed Ambrose quote at #6. HT Waymad; also some cartoons)