Here's my Top 10 links from around the Internet at 1 pm 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 is #1 on the risks a US dollar surge could destabilise China. Buckle up for turbulence.
1. What happens when the US$ surges? - That has what has happened in the last couple of weeks.
Fear (and hope) that US interest rates about to rise from 0-2% to something higher has caused a surge in the US dollar.
That is causing some to wonder might happen next in the so-called 'BRICS' markets of Brazil, Russia, India, China and South Africa, where almost all of the economic growth of the last 5 years has come from.
Ambrose Evans Pritchard has an excellent piece looking at how the US$ surge could puncture the growth booms (or are they bubbles) in these markets.
Where would the growth globally come from then?
This matters for New Zealand, which is now increasingly focused on the IC part of the BRICS. It's also worth noting that South Africa's Current Account Deficit of 6% is now seen as a trigger for capital exodus. NZ's CAD is headed towards that 6% level too.
The stock of capital flowing into emerging markets has doubled from $4 trillion to $8 trillion since the Lehman Crisis, chasing a catch-up growth story that looks tired and has largely sputtered out in Brazil, Russia and South Africa.Much of the money has gone into debt, with falling economic returns. This is the next shoe to drop in the festering saga of global imbalances. All it will take is a gear-shift by the US Federal Reserve and the inevitable dollar surge that follows. It was the Volcker Fed that set off Latin America's defaults in the early 1980s. It was the mighty dollar that set off Mexico's Tequila crisis, and then the East Asian chain-reaction in the 1990s.
"Every emerging market blow-up that I have seen was preceded by a rise in the dollar," said Albert Edwards for Societe Generale.
"Investors overlook how vulnerable these countries are to a dollar shock. The whole process of excess liquidity and foreign reserve build-up goes into reverse. It acts like monetary tightening and turns into a vicious circle. Markets look for the weak link with the worst current account deficit, and then the dominoes start to fall," he said.
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2. The yen's slump matters a lot for China too - Ambrose does a nice job of tieing in the slump in the yen in the last six months and showing how disruptive it was for China in the past. The Yen and the Nikkei's violent moves of the last couple of days suggest something is on the move that's worth watching.
Stripped bare, the BRICS miracle is really about China, and even the Politburo has run into diminishing returns after ramping up credit from $9 trillion to $23 trillion in four years. At best China will have settle for more pedestrian growth, but it too is at the mercy of the Fed.
By pegging its currency to the dollar it risks an exchange rate surge against the rest of Asia, compounding the effects of a 30pc rise against Japan's yen since last summer.
This looks all too like the mid-1990s, when the yen crashed against the dollar and gave China a brutal deflationary shock. China's $3.4 trillion foreign reserves will prove no defence. To deploy reserves the would entail conversion back into yuan, causing the currency to rise. It would exacerbate the shock.
To cap it all, this is happening just as China's trade surplus vanishes and American firms switch plant back to US soil for cheaper power and better labour productivity. The wheel is turning full circle.
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3. 'Vee haf vays of making zee continent ours' - Sorry for the crude stereotype, but there's something in this line from Jim O'Neill at Bloomberg that the Germans have finally established their dominance over Europe after all these years.
He's referring to the European Cup final due this week between Borussia Dortmund and Bayern Munich, but he sees wider lessons.
Fiscal rectitude, as you might guess, comes into it as well. German football has built its success this year on the biggest match-day attendances of the top European leagues, even moving ahead of the British Premier League -- solid revenue. Its clubs, which by the way have to be majority-owned by Germans, operate under tight restrictions on the use of debt for acquisitions -- prudent finance. By global industry standards, wages consume a small share of receipts -- cost control.
By contrast, look at the news from some of the gaudier leagues. Strength in depth? Madridand Barcelona dominate the Spanish game so completely that La Liga almost resembles the Scottish league these days, with about the same degree of boredom over which club might upset the standings. As for fiscal control, I used to joke that you would know the euro crisis was serious once Spanish banks stopped doling out cash so readily to the country’s football clubs. Actually, that moment has arrived.
An English soccer star of the 1980s, Gary Lineker, once defined the sport in a way that still makes sense to Englishmen. Football: a simple game in which 22 men chase a ball for 90 minutes and at the end the Germans win. Must we accept the corollary? European monetary union: a currency system in which 17 countries strive to stay competitive and at the end the Germans win.
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4. Where does it stop? - Jonathan Weill makes some excellent points in this Bloomberg piece about Apple's tax reduction techniques. I wonder how all those non-evil and very bright employees at companies such as Apple/Google/Facebook/Amazon can justify their continued employment at these companies when they know about this stuff?
Or have they caught the sociopath bug too?
Here's Weill:
The Senate report said Apple shifted $74 billion in income to Ireland from the U.S. through its cost-sharing agreement from 2009 to 2012. This helps explain why $102 billion of Apple’s $145 billion of cash and marketable securities was assigned to offshore subsidiaries, as of March 30. Even that comes with a twist: Most of the “offshore” funds are kept at U.S. banks.
Beyond the questions of tax fairness, or how best to simplify and reduce rates, we should ask ourselves: Is this the kind of culture that our laws should be fostering? The people running Apple -- whose board includes former U.S. Vice President Al Gore -- aren’t being dodgy for tax purposes because they are evil. The law encourages them to behave this way, which leads to other uncomfortable questions.
If a company’s managers are willing to devise bizarre structures and stratagems to reduce corporate taxes, would they resort to creative accounting to boost the earnings they show investors on their financial statements? What other sorts of liberties might they be willing to take? Where does it stop?
5. Infrastructure capital and social capital - Michael Pettis has a nice piece here (via FTAlphaville) on why heavy infrastructure investment doesn't always lead to a country becoming permanently and sustainably wealthy. He's obviously referring to China, which is why it's important for us.
To me one of the most obvious pieces of evidence that it takes a lot more than increases in capital stock to achieve sustainable wealth is the experience of previously advanced economies that have been laid low by war. It is noteworthy that – excluding trading entrepôts like Hong Kong and Singapore or small, commodity-rich entities like Kuwait or 18th Century Haiti – very few poor and undeveloped economies have made the transition from poor to rich. The exceptions may be South Korea and Taiwan, both under very favorable circumstances during the Cold War. “Poor” but advanced countries, however, like Belgium and Germany after WW1, or Germany and Japan after WW2, saw their GDP per capital soar after devastating wars as they made the transition from newly poor to rich with relative ease.
The reason, it seems to me, is that although war may have destroyed physical capital in these countries, because it did not destroy social capital these countries were able sustainably to increase investment at a rapid pace after the war and see their per capita incomes soar permanently. Why is this so easy for advanced economies made poor by physical destruction of their capital base but so hard for developing economies?
The most plausible reason I can think of is that the advanced economies already had in place the institutions that allowed them to exploit investment fully, and so once they were able to increase capital stock, they quickly became rich again. This argument is reinforced, I think, by the well-known fact that most cross-border capital flows (over 90%, I think) are to rich countries, not to poor ones. This wouldn’t make sense at all if rich countries didn’t have a greater ability to absorb new capital efficiently and profitably than poor countries. If what mattered on the other hand was distance from the capital frontier, the further a country was from that frontier, the more profitable it would be to invest there, and so more capital would flow to poor countries rather than to rich countries. The opposite is true.
So what kinds of institutions might matter? Economies with clear and enforceable legal systems, to take one factor, tend to have higher levels of social capital because it is much easier for entrepreneurs to take advantage of conditions and infrastructure to build profitable businesses. Without a clear legal framework, business opportunities tend to be monopolized by entities that have the political clout to take advantage of the legal system, and not only is it not obvious that more powerful entities are more economically efficient, but in fact the opposite may be true – these are what Acemoglu and Robinson call “extractive” elites.
Green’s suggestions for reform begin with abolishing the one child policy and include instituting a good legal framework, supporting NGOs, allowing citizens to report on corruption via social media, reforming the ‘hukou’ household registration system.
7. 'This time it's different' - James Suroweicki argues at the New Yorker that US stock prices are not over-valued and the bubble whingers are wrong.
Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to. In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent.
Then, there’s globalization. Many of the “American” companies in the S. & P. 500 are multinationals: a study of two hundred and sixty-two of them found that, on average, they got forty-six per cent of their earnings from abroad. This is a relatively new phenomenon. As late as 1990, foreign earnings accounted for only a small fraction of corporate profits in the U.S. Today, they account for almost a third of corporate earnings, and they’ve nearly tripled since 2000. So comparing corporate profits only to American G.D.P. yields a false picture of how companies are doing. The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit.
Finally, the decline of unions and the sluggish labor market have enabled corporations to cut payrolls, thus keeping profits high. The result is that labor’s share of the economy has fallen steeply. Skilled workers are still in demand, but most workers have little bargaining power. This could change if there is another economic boom—during the tech bubble, in the late nineties, wages did rise briskly—but, even in that case, corporate profits would likely stay high, as increased sales would make up for narrowing profit margins.
8. Where in the world is Satoshi Nakamoto - Chartgirl documents the hunt for the mythical creator of Bitcoin, who is now the internet's equivalent of Keyser Soze from the film classic "The Usual Suspects".
Here are some sentences that start with 'Satoshi Nakamoto' that we can complete:Satoshi Nakamoto might be one person. Or two. Or more.Satoshi Nakamoto could be a government. A FOREIGN GOVERNMENT. (Seriously, has anyone considered whether North Korea is Satoshi? This is just the kind of crazy stunt those guys would pull.)Satoshi Nakamoto sometimes used UK spellings like "favour", "colour" and "modernised" and phrases like "bloody hard." Also, sometimes he didn't.
9. Totally couldn't resist - Here is a NYDaily news story about a Tiger called Ty who developed the hairballs pictured below that was recently surgically removed by veterinarians in Florida.
10. Totally Clarke and Dawe on a colourful Sydney racing identity.
(Updated with fresh Dilbert and cartoons)
15 Comments
#1
"Fear (and hope) that US interest rates about to rise from 0-2% to something higher has caused a surge in the US dollar."
AND
"Where would the growth globally come from then?"
We read so much about economic growth and how we need it badly. While others argue it is a bad thing and unsustainable.
So really, what is economic growth?
Well, you may be surprised, there is more to it than meets the eye.
Suppose a tree grows at a rate of 10 cm every year for the life of the tree.
The tree is growing but its growth has Uniform or Constant Acceleration of 10cm per year every year for the life of the tree.
But if the tree is growing at an increasing rate, say 2% per year, for every year of its life
The tree is growing, but that growth is accelerating exponentially for the life of the tree
If, as the tree gets older, the rate of growth slows from 10cm/year to 9cm/year to 8cm/year and so on then
The tree is still growing, but its growth is decelerating at a uniform rate of 1cm per year.
From this example we can see that there is more than just growth at play and that we must consider acceleration.
Looking at the economy, we see from the above
That every dollar traded is a dollar of growth. That is regardless of whether total GDP rises, falls or remains constant over a given period of time.
We see that the changes to total GDP growth over a given period of time are due the rate of acceleration/deceleration in economic activity.
Now
If the economy is growing by $1 billion per year every year, the economy is growing but that growth has Uniform or Constant Acceleration of $1 billion per year per year
But if the economy is growing by 2% per year every year, the economy is growing but that growth is accelerating exponentially at 2% year on year.
And if economic activity falls by 0.25% each year then the economy is still growing but that growth is decelerating exponentially 0.25% year on year.
Clearly, exponential accelerated growth is unsustainable, so taking about economic growth in terms of percentages is daft.
In order to say, with any clarity, that uniform or constant economic growth is sustainable, we need to analyze that on a local and global basis. Not all local economies are equal.
In order to grow you have to have a Market and a Market must have access to, and demand for, goods and services. It is the Markets ability to access those goods and services, to on-sell, that determines the achievable growth rate. If you do not have the local means of acquiring those goods, then do you have the means to import them?
On a Global level, do we have the resources to meet the worlds expectations for today and into the future.
So that is growth from my perspective. Clearly we need to make clear what we are taking about when we talk about growth. Saying we need a percentage growth is showing your ignorance.
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And, on the interest rate question
If you put money in the bank at 3% interest per year then your money is growing at an accelerating (exponential) rate and, I believe, that is also unsustainable.
If a bank has $100 billion in deposits at 3% per annum
25 years later it will go over twice the size
14 years after that it will go over three times the size
9 years after that it will go over four times the size
8 years after that it will go over five times the size
6 years after that it will go over six times the size
5 years after that it will go over seven times the size
Just imagine if interest rates climb to 7% or more the exponential acceleration in growth will be even faster
And where does all this money to pay interest rates come from?
It transfers from the productive economy to the financial economy, and that also effects economic growth by reducing demand
Mike B,
Thoughtful piece, thanks. Being picky, if economic activity falls 0.25% a year, then it actually falls. I presume you mean the rate of growth falls 0.25% a year, in which case it would still be growing, assuming it was at least 0.25% the year before.
I would be inclined to add to your summary: GDP as a measure is far from perfect, while whether real or nominal GDP is being discussed is often opaque. A modest lift in nominal GDP even if real GDP is stagnant, is normally considered beneficial, as it allows some reasonable flexibility in the economy without people going bankrupt or getting financially stressed.
Separately, real GDP per capita seems to me the best of the GDP scores to aim at; but is not often focussed on by politicians for some reason- I suspect capture by larger business interests who really look to grow their businesses only, and so look for overall growth. A non GDP score that is interesting to me would be net real assets per capita- a measure of wealth rather than income. In my view, from an economic point of view, national settings should be set to try and encourage a lift in incomes and wealth (not quite the same thing); as well as some measures to ensure working people up and down the pyramid are not left out of the practical benefits of their work.
Relevant to the story re growth is this piece from the Telegraph on UK debt and growth.
Fisher summarises the effect of a debt overhang pretty well, and although there are things he probably can't say as a BOE board member, I personally infer that they (the BOE, less the government) are managing things relatively well. Given then that the UK had very high private debt when the GFC came about ( a GFC which hammered their primary industry, finance, and where the Germans have ensured their main trading partner in the rest of Europe is undergoing unthinkable recession- see Bernard's other story); the BOE has done okay.
Remember that economics says that a government deficit must equal a private surplus, (or vice versa) less any leakage in the currrent account.
For private debt to drop, there had to be a government deficit, or an unlikely current account surplus, along with nominal GDP and wage growth (read higher than usual inflation, where they have deliberately managed to 4-5%).
The government has certainly had deficits, at ~ 7% of GDP; funded partly by current accounts of 2-3% of GDP; but helped considerably by printing of say 5% of GDP to fund part of the government deficit. Otherwise the sums say that private saving would have to have been lower (and so indebtedness a problem for longer); the budget deficit higher, or funded by a bigger current account deficit- so more foreign borrowing or asset sales.
NZ's circumstances are similar- although our primary trading industry- dairy- has actually had good terms of trade; while our main trading partners, particularly China, have fared a lot better than Europe.
Nevertheless we have chosen slower national deleveraging, by borrowing from foreigners, rather than printing some of our own deficit. So when the GFC does stutter to a finish, I actually think the UK will be better positioned wealth and income wise to kick on than we will.
Put another way, how wealthy is Steve Jobs now? Is there anybody who would swap places with him? I am sure he would swap with ANY of us in a heart beat even the old and poor. If our body becomes uninhabitable, we have lost everything. If our world becomes uninhabitable, the same scenario.
Would any of us swap places with Sir Paul Holmes, Knighthood and all?
Very interesting article on how societies with a strong legal system recovered well from catastrophic events as this provided a good foundation for entrepreneurs and new businesses. This does not bode well for the USA where both the legal and political systems appear to be in the pocket of the financial elite.
This is a beaut of a chart (unfortunately we are not on it):
http://graphics.wsj.com/national-debts/#i[]=999
I am keeping a wee eye open on the Dutch situation. As you can see Holland is stuck with a bunch of reprobates such as Spain and Ireland with a massive private debt (related to housing bubbles). The Dutch have already had to nationalise one bank and its worth keeping a weather eye on how this situation is going to effect Rabobank NL, the parent of our own Rabobank. Its always assumed the powerful parent would rescue the child, but the parent might get in deep s##t.
Its my belief that Rabo bank are not exposed to the housing market.
I talked to a manager and he told me there would be a housing crisis, this was three or four years ago.
He did tell me that thye had to take over a bank with a lot of housing exposure but that the government was controling the take over and he thought the deal would have included a safety net for Rabo, as they did not wish to take over the bank at the time.
He was not happy about the potential for housing to collapse way back then.
Hmmm Andrew I think you need to revisit that. According to this Rabo is the biggest mortgage lender in Holland:
http://www.dutchnews.nl/news/archives/2013/02/internet_banking_leads_ra…
They have also been put on negative watch:
http://www.reuters.com/article/2013/04/04/fitch-affirms-rabobank-at-aa-…
http://www.moodys.com/research/Moodys-changes-outlook-on-three-Dutch-ba…
I aint saying they are in imminent danger, but it is well worth keeping a weather eye on the parent.
News Alert
Thirteen of the top ASX20 companies, including two of the big four Australian banks, have entities in well-known tax havens such as the Cayman Islands, Luxembourg, the British Virgin Islands and Bermuda. A Uniting Church report, Secrecy Jurisdictions, the ASX100 and Public Transparency, reveals 61 of the top 100 companies held subsidiaries in ‘‘secrecy jurisdictions’’ as of April 2011 that have been targeted by tax authorities for sheltering companies dodging tax.
Someone mentioned IBM would not be a big tax dodger, its no9 of the top 10.
http://cdn.billmoyers.com/wp-content/uploads/2013/05/offshore2013.jpg
http://billmoyers.com/2013/05/24/its-not-just-one-bad-apple/
That was me, I was talking in context of taxes paid in New Zealand, where they seem to be paying a reasonable amount of corporate tax.
i would also note their appearance on the link is for off shore holdings, which is not the same thing as tax (though one is often related to the other) and that Forbes magazine describes IBM global as one of the companies that pay the most corporate tax (effective rate 24%)
The no-hopers riot in sweden,
http://www.stuff.co.nz/world/europe/8716978/Reinforcements-called-in-fo…
not good....
:(
of course it isnt that bad yet....is it?
regards
While that article noted youth unemployment in the riot areas was around 30%, general youth unemployment there is around 25% said something I was reading the other day, which is generally considered ticking time bomb levels.
I was so relieved when it looked like New Zealand's rates peaked at 17.5% (a genuine thank you to Australia, for giving our young hope of a better life)
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