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- Bernard's Top 10 at 10 15
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- 90 seconds at 9 am: China power dims 6
Friday's Top 10 with NZ Mint: US financial transactions tax?; Fears of a 1914-style march to war between China and Japan; Greek coup talk; Libor love emails; Clarke and Dawe; Dilbert
Here's my Top 10 links from around the Internet at 9 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 #3 on the prospects for war between Japan, the US and China. Everyone thinks it's impossible that such rational powers could stumble into such a thing. Just as no one thought the great European powers could be so stupid as to stumble into war in mid 1914...
1. US financial transaction tax? - Now that Germany and France are bringing in a financial transaction tax, people are looking around for the next domino to fall.
No one thought America would be next.
But there are murmurings inside the Congress.
The politics of a tax on Wall St players is easy.
The budgetary drivers are pretty attractive too.
Of course, the lobbyists crawling all over the Republican-controlled house of Representatives aren't keen.
Here's Jesse Eisinger at Pro Publica on the prospects:
On this side of the Atlantic, there is a ghostly silence on a transaction tax in respectable political quarters. But that might change. This month, Sen. Tom Harkin, Democrat of Iowa, and Rep. Peter DeFazio, Democrat of Oregon, plan to reintroduce their bill calling for just such a tax.
A transaction tax could raise a huge amount of money and cause less pain than many alternatives. It could offset the need for cuts to the social safety net or tax increases that damage consumer demand. How huge a sum? Harkin and DeFazio got an estimate from the bipartisan Joint Committee on Taxation, which scores tax plans. It's a hearty one: $352 billion over 10 years.
The money would come from a tiny levy. The bill calls for a three-basis-point charge on most trades. A basis point is one-hundredth of a percentage point. So it amounts to 3 cents on every $100 traded.
And the bill contains some exemptions intended to make the tax more politically palatable. The first sales of stocks (initial public offerings) and bonds are exempted, so that the markets' capital-raising function isn't harmed. Initial investments and withdrawals from tax-protected accounts, like retirement or education funds, also have a measure of protection.
2. Not so fast - Tim Harford has an entertaining discussion about the pros and cons of a financial transaction tax in this piece here. He concludes other taxes on bankers may be better. HT Matt Nolan.
Surely you’re not saying we shouldn’t tax banks and bankers?
Of course we should. I’m with the IMF on this: the FTT is feasible but we have better options, including value added tax on financial services or taxing balance-sheet debt to reduce leverage. To invert an old saying, the FTT is the best possible tax on banks – apart from all the other ones that have been tried.
3. China vs Japan - The FT's Gideon Rachman makes the comparison between the tensions now over the Senkakus/Diaoyus and the seemingly inevitable march to war through the Balkans in August 1914. War was thought impossible in early 1914.
The idea that the great powers of today could never again stumble into a war, as they did in 1914, is far too complacent. The rising tensions between China, Japan and the US have echoes of the terrible conflict that broke out almost a century ago.
The most obvious potential spark is the unresolved territorial dispute between China and Japan over the islands known as the Diaoyu to the Chinese and the Senkaku to the Japanese. In recent months, the two countries’ aircraft and ships have shadowboxed near the islands.
Alarmed, the US dispatched a top-level mission to Beijing and Tokyo in late October, made up of four senior members of the US foreign policy establishment: including Stephen Hadley, who ran the National Security Council for George W. Bush, and James Steinberg, who served as Hillary Clinton’s number two at the State Department.
This bipartisan US delegation made clear that a Chinese attack on the islands would trigger the security guarantees that America has made to Japan. The obvious danger is that, as in 1914, a small incident could invoke alliance commitments that lead to a wider war.
Former Greek deputy Finance Minister Petros Doukas has suggested that the jobless be put to work on a voluntary basis without payment. One can only wonder how this is being received by the horde of former public employees long accustomed to getting paid without working.
A series of small-scale bombings and arson attacks have rattled Athens. Roving bands of club-wielding thugs have targeted immigrants and minorities in vicious drive-by beatings. Gunshots have flown through the windows of politicians who have fallen out of popular favor. An urban guerrilla group whose name translates to the "Circle of Outlaws/Nucleus of Lovers of Lawlessness-Militant Minority" is claiming responsibility for attacking journalists for the crime of defending government policy. Arrests for any of these crimes are rare. How long before someone gets the clever idea to stage a Reichstag fire?
When the anarchist/communists explode and the fascist/nationalists fight back, will we see a repeat of a civil war that claimed more Greek lives than World War II? How long before a frightened and suffering middle throws its weight behind a junta promising security? Someone will have to restore order when the German money runs out, because it sure won't be German soldiers that are sent to keep the peace.
5. The mood is turning again on Europe - Citigroup's Chief Economist Willem Buiter points out the stock market rallies in Europe and the United States in recent months are based on not much at all.
We recognise that, in a decentralised market economy where expectations of the future, moods, hopes and fears drive private (and sometimes also government) behaviour directly and through their effect on the prices of real and financial assets, today’s subjective expectations and other psychological characteristics in part determine what tomorrow’s fundamentals will be.
Irreversible or costly-to-reverse decisions like capital expenditure, human capital formation, resource extraction etc, are driven by subjective expectations and moods, making the distinction between a fundamentally warranted asset boom and a bubble slightly fuzzy at the edges. this indeterminacy, bootstrapping, self-validating characteristic of complex dynamic economic systems inhabited by partially forward-looking households, firms and policy makers – called reflexivity by George Soros – can be taken too far.
Mere optimism and confidence will not permit the authors of this note to bootstrap themselves into winning the men’s doubles at Wimbledon.
6. Why do people put these things in emails? - Felix Salmon writes at Reuters' Counterparties about the emails found in the bowels of the computer systems of Royal Bank of Scotland and others when the investigators looked at their LIBOR rigging.
There’s a certain inevitability to RBS’s $612 million Libor-rigging settlement and the Justice Department’s civil charges against S&P for faulty ratings. Like at Barclays, Goldman Sachs, Standard Chartered, and UBS, RBS and S&P’s scandals come complete with how-could-they-put-that-in-writing electronic communications. RBS’s contributions to this now-venerable tradition come courtesy of the CFTC and FSA, and are wrapped up nicely by Dealbook and FT Alphaville.
One trader asked that the rate set be at a certain level by writing to the submitter that “if u did that i would come over there and make love to you”. Another said “its just amazing how libor fixing can make you that much money”. Believing that the US dollar Libor was being watched by the Fed, a Yen trader said “dun think anyone cares the JPY Libor”. Scattered throughout is the requisite amount of trading floor profanity, along with a decent number of emoticons.
7. Boom and bust - Jeremy Grantham from Hedge Fund GMO writes with some pungency about the US Federal Reserve's artificially low interest rates.
The artificially low T-Bill rates first work their way slowly up the curve. Next, the most obviously competitive type of equities – high yield stocks – begin to be bid up ahead of the rest of the market, as has happened. “I’ve just got to squeeze out some higher rates somewhere, anywhere,” is the pension fund plea.
Then, this low rate competition begins to filter into other securities, historically sought after for their higher yields: higher-grade real estate, where the “cap rates” slowly fall; and, unfortunately, also forestry and farmland, mainly of the larger and more standard varieties that appeal to institutions, which show declines in their required yields, i.e., their prices rise. The longer the engineered rates stay below true market rates, the higher asset prices become until, yes, you’ve got it, corporate assets begin to sell way over replacement cost.
Then, if the heart of capitalism is still beating at all, a long period of over-investment begins and returns are bid down and everything moves into balance, often helped along if asset prices get too high, as in 2000 and 2007, by a good healthy market crunch.
(This strategy will be seen in future years as archetypical of the Greenspan-Bernanke era: badger and bully investors into taking more risk and eventually pushing assets – houses or stocks or both – far over replacement value, followed eventually, at long and hard-to- predict intervals, by exciting crashes. No way to run a ship, but it does produce an environment that contrarians like us, who can take a few licks, can thrive in.)
8. It's a bubble - GMO's Edward Chancellor and Mike Monnelly write about the risks and pressures building up inside China's financial systems.
Not only does financial fragility look to be on the rise, Beijing seems to be on the verge of losing control over the credit system. Savings are migrating from deposits in the state-owned banking system to higher-yielding nonbank credit instruments. Furthermore, rich Chinese are increasingly willing to evade capital controls and take their money out of the country. As a result of these developments, deposits in the banking system are becoming less stable.
“Red Capitalism,” namely the ability of the Chinese authorities to direct the country’s enormous savings for their own ends, faces an existential threat. A Credit Bubble Economists have woken up to the fact that periods of rapid credit growth generally end badly. As one recent paper puts it, “credit [growth] matters, and it matters more than broad money, as a useful predictor of financial crisis.”2 China today seems to be in a similar predicament to several of the developed economies prior to 2008. Too much credit has been created too quickly.
Too much money has been poured into investments that are unlikely to generate sufficient cash flows to pay off the debt. Last year, for instance, new credit extended to the non-financial sector amounted to RMB 15.5 trillion. That’s equivalent to 33% of 2011 GDP, although as Fitch Ratings notes, overall credit formation is running at an even faster rate when items missing from the official data are added in.
9. Other ways to devalue internally - Bloomberg profiles Harvard Economics Professor Gita Gopinath and her ideas for country's to use fiscal policy to devalue their way back to competitiveness, instead of using their currencies.
This is particuarly topical for those countries in the Euro zone who can't devalue their way back to growth. Instead, at the moment, they are being forced to cut wages to become competitive.
Here's Gopinath's idea, as told by Bloomberg:
The paper examines a “remarkably simple alternative” that doesn’t require countries to abandon the euro and devalue their currencies, Gopinath said. By increasing value-added taxes while cutting payroll taxes, a government can create very similar effects on gross domestic product, consumption, employment and inflation.
The higher VAT raises the price of imported goods as foreign companies pay the levy. The lower payroll tax helps offset the extra sales tax for domestic companies, reducing the need for them to raise prices. Since exports are VAT exempt, the payroll-cost saving allows producers to sell goods cheaper overseas, simulating the effect of a weaker currency, according to the paper.
The policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue, Gopinath said.
10. Totally Clarke and Dawe on the new formats in current affairs television. Tremendously topical.