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Thursday's Top 10 with NZ Mint: How about issuing government bonds that don't have to be repaid?; If only Stanley Fisher was now RBNZ Governor; Beijing's 'worrisome' smog; Dilbert
Here's my Top 10 links from around the Internet at 3 pm 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 Martin Wolf on what a central banker could be.
1. An excellent central banker - Yes there is one.
Martin Wolf at FT.com reports on the resignation of the Bank of Israel's Stanley Fisher and how he will be sorely missed.
Fisher acted pragmatically in Israel, intervening in currency markets and introducing macro-prudential tools to try to cool its housing market.
Israel's economy has done particularly well over the three to four years, despite a lack of obvious physical attributes similar to Australia.
Here's Wolf, who is always an excellent read:
Apart from skilful monetary policy, the Israeli central bank made early use of what are now known as “macroprudential” policies – attempts to affect asset price booms and credit bubbles other than via monetary policy. As other central bankers are likely to find, such interventions, particularly in housing markets, proved highly unpopular. Mr Fischer was also willing to intervene in currency markets, to lean against the wind of inflowing “hot money”, accumulating substantial reserves in the process.
This remarkable (and justified) pragmatism came not only from Mr Fischer’s academic work as a macroeconomist, but also from his prior experience as a policy maker, notably as first deputy managing director of the International Monetary Fund between 1994 and 2001.
2. The amazing Beijing smog - Here's the The Atlantic with some amazing pictures of the smog in the Chinese capital. No wonder rich Beijingers and Shanghaiers want to buy property in Auckland.
Since the beginning of this year, the levels of air pollution in Beijing have been dangerously high, with thick clouds of smog chasing people indoors, disrupting air travel, and affecting the health of millions. The past two weeks have been especially bad -- at one point the pollution level measured 40 times recommended safety levels. Authorities are taking short-term measures to combat the current crisis, shutting down some factories and limiting government auto usage. However, long-term solutions seem distant, as China's use of coal continues to rise, and the government remains slow to acknowledge and address the problems.
3. Europe's Financial Transactions Tax - Felix Salmon at Reuters likes the early look of Europe's Financial Transactions Tax.
The details of Europe’s new financial transactions tax won’t be made public for a few weeks, but the FT’s Alex Barker has seen a draft, and it looks impressively robust. The tax is being implemented by 11 countries, including most importantly Germany and France, and it’s going to be levied at two levels: 0.1% on securities trades, and 0.01% on derivatives trades. It’s also going to be very difficult to dodge: any trader whose institutional headquarters is in one of the 11 countries will have to pay the tax, as will all transactions taking place in those countries, and all transactions involving securities issued in those countries.
The tax will have two main purposes. The first is to raise substantial tax revenues on the order of $45 billion per year; the second is to discourage financial speculation. I’m hopeful on the former, but less so on the latter.
As Robert Peston and Avinash Persaud pointed out back in 2011, financial transactions taxes work pretty well: even the UK, which is implacably opposed to the European tax and which won’t ever join such a scheme, levies a surprisingly large 0.5% tax whenever anybody — anywhere in the world — trades a UK stock. And yet, somehow, London remains the first choice for international companies looking for a place to list their shares.
4. How about perpetual bonds - Matt Yglesias at Slate reckons it's time to revive the British innovation from the 18th century of perpetual bonds.
Modern-day finance, of course, is generally much more sophisticated than even the cutting edge of the 18th century. But our former colonial masters did have one good idea that’s since been abandoned and deserves revival: perpetual bonds. In 1752, Prime Minister Henry Pelham converted the entire outstanding stock of British debt into consolidated annuities that would become known as consols. The consols paid interest on an annual basis just like regular bonds, but with no requirement that the government ever redeem them by repaying the face value. Pelham created the bonds in order to reduce the government’s annual debt service costs. That isn’t our problem today.
Instead, a modern-day consol would target another problem: political reluctance to take advantage of record-low interest rates. Excessive worry about deficits is hard to purge from the system. One common objection, raised recently by Damon Linker is that “the principal on a loan (even one taken at zero or negative interest) eventually has to be repaid.” Except it doesn’t.
Right now, the Treasury Department floats loans of a variety of durations, ranging from 28 days to 30 years. Lenders generally demand higher interest rates for longer-duration loans. But right now the rates on even the 30-year loans are extremely low. We could—and should—imitate Pelham and see what the market would demand for a loan that never has to be repaid. How high an interest rate would people demand for a loan like that? Well there’s no way to know without offering one on the marketplace. But right now 30-year bond rates are at never-before-seen lows, so paying a higher rate wouldn’t involve any unprecedented borrowing costs.
5. So who makes the money? - US fund manager Paul Singer, who manages over US$20 billion, has written a letter to investors talking about who creates money these days, and its not governments, or necessarily, banks. HT Zerohedge. Singer doesn't like Quantitative Easing, which he says is money printing.
Things have gotten really complex and subtle in the modern banking and derivatives era, and that the old model of money as being solely or mainly the product of bank reserves and bank loans is woefully inadequate.
The Fed’s explanations of these policies are delivered with equanimity and aplomb. However, in our view, the inventions of modern finance have “gotten away from them” and are not adequately understood by the money-printing overseers. A “smoking gun” is the complete failure of policymakers (and financial-institution executives) to predict or understand the circumstances surrounding the 2008 financial crisis – neither the inner workings/interconnectedness of the institutions involved nor the risks inherent in the system.
It is critically important for investors to try to understand what global QE is actually doing, where it may lead, and what will happen when it slows, stops or shifts into reverse. What we urge most strongly is that the current atmosphere of calm and stability, and the lack of virulent inflation, must not be relied upon to continue forever. There are certain words and phrases in official communications that give some hint of the uncertainty that exists about key elements of central-bank policies: confidence, anchored inflationary expectations, and velocity are prime examples. Our takeaway is that when investors lose confidence in ZIRP-soaked, QE-ridden, faith-based paper money, the consequences could be abrupt and catastrophic to societal stability. We do not know exactly what to do about it, except to urge policymakers to STOP substituting QE for sound tax, regulatory, labor, environmental, and fiscal policies.
6. It woz leverage wot did it - Chris Arnade from Scientific American nails the important role of leverage in the financial crisis. It should be remembered by all those people borrowing 95% and 100% from their banks in New Zealand at the moment.
Wall Street killed itself in a time-honored fashion: Cheap money, excessive borrowing, and greed. And yes, there is an equation one can point to and blame. This equation, however, requires nothing more than middle school algebra to understand and is taught to every new Wall Street employee. It is leveraged return.
What is leveraged return? It’s the return on assets using borrowed money.
2005 and 2006 were record-breaking years on Wall Street. Assets were at historical highs and lending was also. Leverage at major financial had grown from around 20 times capital to 35 times. The easy money was gone, but management felt profits had to keep pace.
Chuck Prince, CEO of Citibank, in a now infamous quote said, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”
Haircuts could not go much lower. Now simple greed took over. The banks turned to outright purchases of securities, morphing their role as lenders into investors.
7. Don't trust America - Says American economist Kenneth Rogoff when talking about its government borrowing and Reserve Currency status. He's no Keynesian.
The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much. The US debt level is a constraint. A growing number of empirical studies, including my own joint work with Carmen Reinhart, suggest that the US has already reached a debt level that has been associated with slower growth in advanced countries. The fact interest rates are low today does not necessarily mean the US is an exception to this rule – take one look at stagnant Japan’s rates. The dollar’s reserve currency status buys America more room, but how much and for how long? A high debt burden is a problem precisely because it reduces a country’s capacity to deal with future shocks.
The US remains an incredible franchise with many remarkable strengths. The world’s overwhelming presumption is that Americans will find a path to budget sustainability. Nevertheless, it is hard for many in the US to escape the nagging feeling that just maybe this time we won’t. With more than $5tn of US Treasury debt, and memories of the huge inflation of the 1970s and default on gold clauses in the 1930s, foreigners would be right to worry a little.
8. Why do Chinese billionaires keep ending up in prison - The Atlantic has a view. It's the curse of the rich list. Now where was my NBR rich list...
In most places, being ranked by a prominent magazine among the wealthiest people in the country constitutes a great honor. Not in China. Such lists, known as bai fu bang in China and published in Forbes and its Chinese equivalent Hurun, are described instead as the sha zhu bang: "kill pigs list."
In the last fifteen years, China has produced greater overall wealth than any other country. The number of its billionaires has gone from a mere 15 to around 250 in just six years, but for a number of these people this vaulted status is short-lived. According to one study, 17 percent of those on the list end up squealing their way to court or end up in jail. If they're lucky, those who are caught are investigated and jailed. Some are even executed.
9. Smog emergency - The New York Times reports China has ordered the closure of 100 factories and the removal of a third of government cars from the streets.